Mega IT deals at 5-yr low, smaller ones in focus

Changing Biz Dynamics

- IT firms need to realize results of outsourcing faster

- Given the explosive growth of cloud, there are fewer technology assets like servers and software licenses

- As a result, 2023 may bring in more cost takeout deals as compared to smaller digital deals

Bengaluru: Despite fears of slowdown roiling the world, mega deals are not showing much traction in recent months as used to be the case on previous such occasions. In the third quarter (July-September) of 2022, mega deals touched a five-year low at a combined annual contract value (ACV) of $705 million.

Mega deals are IT outsourcing projects that are more than $100 million in value. Indian IT services companies, especially the top four firms including Tata Consultancy Services (TCS), Infosys, HCL Tech and Wipro, witnessed good number of mega project wins in the last two years. However, the trend has changed with more smaller deals coming to the market than mega deals in FY23.

"Historically, the value of mega awards (more than $100 million ACV) has made up more than 20 per cent of total managed services ACV in the IT and business services sector.However, through the third quarter of 2022, that percentage is down to 10 per cent globally," Global IT research firm ISG's principal analyst, Mrinal Rai told Bizz Buzz. Despite lower number of mega deal wins, deal pipeline of both Indian and global IT firms remained robust, indicating a shift towards smaller deals.

"Enterprises are favouring smaller, shorter engagements. There are a lot of reasons for this: companies need to realize the results of outsourcing faster, and they need to reduce transformation risks. Companies also are increasingly carving out and rebidding less successful components of larger transactions. And, given the explosive growth of cloud, there are fewer technology assets - like servers and software licenses - included in awards than in the past," Rai said.

Management of top IT firms have echoed similar sentiment in their commentary in past quarters. However, earnings of Accenture indicate that next year may bring in more cost takeout deals as compared to smaller digital deals.

Kotak Institutional Equities in a report said Accenture results reinforce what was known earlier, which is the impact of a deteriorating macro is feeding its way into discretionary spending, while cost take-out focus will lead to uptick in managed services.

Indian IT firms have started winning such cost takeout deals with TCS leading the show. The Tata group company this month announced the win from British Telecom, the value of which is pegged at around Rs 2,500 crore (around $300 million).

As chances of such large deal wins increase, large IT firms like TCS, Infosys, HCL Tech & Wipro are expected to get lion share of such contracts as compared to mid-tier firms.

Historically, the value of mega awards (over $100mn ACV) has made up more than 20% of total managed services ACV in the IT and business services sector. However, through the Q3 of 2022, that percentage is down to 10% globally

- Mrinal Rai, principal analyst at ISG