COVID-19 will hit certain Indian IT contracts harder than others
If there's one thing that is certain right now, it's that a recession is coming soon. By almost all accounts, it looks like it will be the biggest hit since the 1930s when the stock market collapsed in New York. However, identifying who will perish, or adapt and flourish, post COVID-19 is still very much an impossible task -- especially so in the technology universe.
Information technology will undoubtedly take a hit, but how every firm fares will depend almost entirely on the financial health of their clients and the nature of the projects that have already been commissioned.
The problem for Indian IT is that when a client coughs up cash for its project, the flow comes from a discretionary spending kitty, which at this point, in all probability, has been decimated by coronavirus.
Airline companies have already been pummelled. So have those in hospitality for the very same reason. For the same reason, any kind of discretionary spending that would have gone towards an IT overhaul in these sectors are probably in code red. So, if you were to have clients in either of these buckets, as do most Indian companies in the top tier, such as Infosys or those that occupy the next rung in Mindtree or Hexaware, you are going to feel a big impact.
Then there's the issue of priorities. With coronavirus hitting sales hard, many clients are now only considering "need-based" IT projects that immediately increase efficiencies and improve cost and manufacturing flexibility, and are tied to specific outcomes. This Economic Times article, for instance, mentioned that clients in the car manufacturing space are deep-sixing projects on connected cars and 5G networks.
In other words, unless a project involves short term gains and a supple supply chain that can flex around uncertain business economics, automation, cloud efficiencies, and artificial intelligence-fuelled improvements, it will probably be tossed aside.
"The discussions are changing. Today they are saying can you help me in making my supply chain agile, decentralised, resilient, reduce total cost of ownership, help in remote control and automation of plants, greater leverage of AR/VR, virtual showrooms … we are looking at many deals around these topics now," said Maneesh Pant, vice-president at Capgemini India.
Size will also matter. The smaller the size of a client company, the more difficult it will be to convince them to retain projects during this time of great tumult. A larger company may in some cases be able to afford to keep such projects, but smaller companies that are suddenly finding themselves on the brink of survival will just not be able to afford to these projects afloat.
That leads to the elephant in the room. Namely, digital projects, which were finally gathering steam and attracting discretionary spending in the past year. These projects took up around 30-40% of the project pipeline for Indian IT last year. That may drop anywhere between 5 to 20 percentage points, according to analysis performed by HDFC Securities.
According to Peter Bendor-Samuel, CEO of research firm Everest Group, digital projects that save money and lower operating costs would continue to attract investment, but those that require capital may not be as popular.
Meanwhile, those that are sticking to plans that were already under way are asking for a steep discount.
"We are seeing 60% of our clients requesting discounts. This can range anywhere from 20-50%, with 30% being the average," Steve Hall, partner and president at ISG reportedly said at a conference.
Clients are also asking for a relaxation of payment due dates by up to three months apparently, making things even more difficult for Indian IT.