Indian IT services firms are gearing up for a slugfest with their global peers as large corporations in the US and Europe are set renew technology outsourcing contracts with a combined value of at least $19.5 billion this calendar.
As many as 686 outsourcing IT deals with value of at least $25 million or more are due to expire in 2012, show data from Information Service Group, a technology market research firm that owns TPI, the largest outsourcing advisory. At least 78 of these deals are worth $250 million each.
The number of deals and the combined value are “new records”, say Paul Reynolds who lead research for the ISG. Global service providers including IBM and Accenture hold 37 % – by value – of the expiring contracts. This spells good news for Indian IT firms, as over the last few years there has been an increasing trend of corporations choosing at least one India-based firm among their technology service providing vendors.
“For some peculiar reason, there is large churn now,” said, a senior executive at HCL Technologies. “Earlier, incumbent players continued because getting in a new vendor is not easy due to costs. Now every one in three deals that are up for renewal are going to new players.”
A report by Standard Chartered pegs the value of new deals coming up for renewal this year at $47 billion. According to the report, at least $6 billion opportunity will come up for large offshore Indian vendors. “If there is a 30% churn that would mean $12 billion worth of new opportunity,” the HCL Technologies executive added. Over half of the deals are expected to come from Europe, the report said. “Market share gains in the renewal deal pipeline will be a key differentiator of volume growth across players in our view.
Further deterioration in macro-economic environment remains a key risk to volume outlook,” Standard Chartered analysts Pankaj Kapoor and Apoorva Oza noted in his report.
In the past few months, HCL has announced new contracts with pharmaceutical major AstraZeneca, oil & gas major Stratoil and telecommunications biggie UPM, in most cases replacing incumbents in deals which were up for renewal.
Other large Indian providers like Tata Consultancy Services too have had significant success in winning contracts where they replaced an incumbent transnational IT player. The company replaced CSC as the IT services provider for Denmark’s largest telecommunications firm TDC.
Though the exact value of the deal is not known, the multi-year deal is pegged at well over $200 million, by industry insiders. “We expect renewal deal market will continue to open up for Indian vendors,” Kapoor wrote in the report. With prevailing uncertainty, the deal sizes are likely to be smaller, which could help Indian IT vendors, especially the mid sized players.
About one-third of technology services contracts expiring in 2012 have an application development and maintenance (ADM) component, an area where Indian IT services providers are known for their strong competencies. Other major services that are part of deals coming up for renewal are related to business intelligence, social media applications and enterprise mobility.
Anjan Lahiri, president and CEO of mid-sized IT firm MindTree‘s IT Services business, says that though number of contracts have gone up, total outsourcing is not going up. “This means companies are splitting up large contracts to smaller ones, which is a good thing,” Lahiri said.
Over the last few years, multi-sourcing has been gaining strength as corporations look to work with more than one technology vendor. However, having a larger services portfolio, the transnational technology firms do have an advantage over the Indian IT firms. “The bigger the deals, the less cost competitive Indian companies are against the likes of Accenture and IBM,” Lahiri said.
That a good chunk of deal renewals are happening in Europe, test the Indian IT firms’ ability to crack the continental European outsourcing market. So far, Indian IT firms have managed to gain entry into UK market but is yet to gain meaningful traction in large markets such as Germany and France.
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