IT clients stick to smaller deals on headwinds

Historically, the value of mega awards made up more than 20% of total managed services ACV in the IT and business services sector. However, through the third quarter of 2022, that percentage was down to 10%.

In fact, awards between $5 million and $19 million ACV have seen the biggest growth year-to-date. And this is diminishing the overall impact of mega awards, said ISG.

In the third quarter of the calendar year, there were a total of three mega awards, with a combined ACV of $705 million. That’s the fewest mega awards the sector has seen since 2017. This means that the sector is growing, but that growth is coming from smaller awards, while mega awards are staying relatively flat, said the report.

“Basically, when the technology cycle is unpredictable customers are preferring to spend in pockets where they can see quick results,” said Mrinal Rai, principal analyst at ISG. This trend has been noted across industries.

Rai expects that if this trend sees success, some of these smaller deals may evolve into large deals.

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The reasons for this include companies need to see the results of outsourcing faster, and the need to reduce transformation risk. Companies also are increasingly carving out and rebidding less successful components of larger transactions.
However, year-to-date, there have been 18 mega awards with a combined ACV of $2.7 billion, compared with 13 in the year-ago period worth $2.5 billion, according to ISG. This indicates that the economic worries have started to hit home in the July-September period, said analysts.

“The headline is that we see some weakening of discretionary spending but a high floor to demand. It appears that there is some pull back in demand but overall demand is still surprisingly strong,” said Everest Group chief executive Peter Bendor-Samuel.

The management consultancy firm sees the modernization work and the discretionary projects related to this facing increasing challenges in getting funded. “That said, we see firms which have hit maturity on their digital transformation agendas continuing to spend and evolve,” he added.

Bendor-Samuel said the increasing interest in cost saving deals will also materially offset the deceleration in discretionary spending for firms like Tata Consultancy Services, Infosys and HCLTech among other IT services firms.

Ravi Menon, IT & technology analyst, India, Macquarie Capital, said that in a cautious spending environment, even some of the smaller firms that are strategic vendors should benefit from vendor consolidation opportunities. “So we wouldn’t expect the deal flow to be only in favour of tier-1 Indian IT companies,” he added.

The brokerage thinks 1HFY24 will see a step up in large deal awards as the macro uncertainty will hopefully reduce by then.