2018's $51B IT renewal deals may not be as sweet as they seem

In an era of fragmented deals, IT companies are seeing revenues decline over the duration of the deal, leading to increased pressure in maintaining margins.

tataconsultancyservicesvadapalani2.jpg

In many cases, these large, lip-smacking deals are often actually broken up into smaller components to be parsed out along the IT food chain. Take the recent much-publicized TCS Nielsen deal, for instance. (Image: Wiki Commons)

It is a familiar time of year, one that Indian IT looks forward to with ritualistic eagerness and anxiety.According to the Times of India, 196 million IT deals -- worth around $100 million each and totaling $51 billion -- are up for renewal this year.

Trump's H-1B crackdown could be the kick in the pants Indian IT sorely needs

Using this impetus to wean themselves off of low-end work and gravitate towards more value-added assignments could save Indian IT.

Read More

Some are big whales, which every IT services giant worth its salt will want to land, such as Siemens' $7.2-billion contract currently with French IT giant Atos.

Read also: Why IoT could be the savior Indian IT desperately needs

Curiously, Indian IT services firms hold only a minuscule portion of that number, specifically a paltry four to date. The good news for them? TOI mentions a study done by research firm ISG in 2016 that scrutinised 180 deals, specifically the fortunes of incumbent vendors during the annual rites of passage that are renewals. The study found that when corporates decided to throw the door open for competitive re-bidding, incumbents lost the contracts in a staggering 47 percent of the cases. With such a low presence amongst existing deals (four to be precise), that's pretty good news for Indian IT looking to beef up their revenues via renewals.

That said, here are a couple of caveats: This is the era of deal fragmentation. In many cases, these large, lip-smacking deals are often actually broken up into smaller components to be parsed out along the IT food chain.

Read also: 'Insourcing' predicted to throttle Indian IT services revenues

Also, sometimes, even when the whole bit is given to one entity, it may not seem to be the gargantuan win that it looks like. Take the recent much-publicized TCS-Nielsen deal, which I wrote about here.

Yes, this is a huge win for TCS, but no, as HfS's Phil Fresht said in a column in Mint, it's not as lucrative as you may think. Here's how the revenue stream is broken up over time: Nielsen will spend $320 million every year, beginning 2017 until 2020, then $186 million per year from 2021 until 2024 and then $139.5 million in the year 2025.

What this means is that TCS will be getting less for the same tasks over time due to assumed efficiencies in digitization and automation. In other words, for TCS to maintain the same profit margins, they will have to employee less and automate more while providing the same value of services.

PREVIOUS AND RELATED COVERAGE

TCS partners with São Paulo government to plug IT skills gap

Indian consulting firm will present IT as a career option to 190,000 Brazilian students across the state ias part of a global education program.

Indian IT's slow road to digital is hampering revenue growth

Indian firms need to take a page out of Accenture's playbook to secure their business in a digital future.

How AI and robots are eating desperately needed jobs in India

Creating a digital economy is a fine idea but who is going to fuel it if over 100 million people have no jobs? This is the fundamental dilemma confronting Indian workers.

Newsletters

You have been successfully signed up. To sign up for more newsletters or to manage your account, visit the Newsletter Subscription Center.
See All
See All