Price war for deals to hit IT firms’ margins

It’s clear that the pipelines are large and stacked with cost saving deals. Most large firms have a significant number of mega deals in their pipelines. However, with everyone going after these deals, the close rates will likely to drop

- Peter Bendor-Samuel, CEO, EverestGroup, tells Bizz Buzz

Bengaluru: Stiff competition in the large deal space among the large IT services companies is leading to fall in pricing, stoking fears of margin headwind in the coming quarters.

According to industry insiders, though many numbers of cost takeout deals are coming to the market as enterprises are looking to save costs, competition is rising among both Indian and global players to increase their shares.

“It is clear that the pipelines are large and stacked with cost saving deals. Most large firms have a significant number of mega deals in their pipelines, however, with everyone going after these deals, the close rates will likely to drop,” Peter Bendor-Samuel, CEO of global consultancy firm, EverestGroup, told Bizz Buzz.

In a recent report, global consultancy firm ISG has also indicated about downward pricing pressure on multi-year big deals.

“When an infrastructure outsourcing contract is signed, the average cumulative unit price reduction over a five-year period is between 10 and 30 per cent, depending on how much transformation is involved. With more transformative deals, price reductions are typically in the high single digits early in the agreement, going down to mid-single digits for the remainder of the term,” ISG said in a note.

It noted that large infrastructure outsourcing contracts were already facing pricing pressure in recent quarters.

Globally, businesses are looking at optimising cost, leading to more outsourcing of technology work to service providers. This trend is leading to more such multi-year deals worth more than hundreds of million dollars coming to the market place. However, all large IT firms- both global and domestic- are vying for clinching such deals.

Accenture CEO, Julie Sweethas said post-company’s second quarter earnings call that cost focus has increased among enterprises. “We talked about starting to see this last quarter, regardless of industry, as the macro uncertainty has increased, right, they're being a little bit more cautious. So, we’re seeing some delays in decision-making. We see changes in the pace of spending, and we’re seeing some pausing of the smaller deals. And all of this impacts the smaller deals more than the bigger deals because we’re continuing to see that big transformation focus,” she said.

Not only Accenture, global firms like Cognizant and Capgemini have also expressed their desire to clinch more large deals to accelerate revenue growth. Cognizant’s new CEO Ravi Kumar has made it a priority to win more large deals in order to overcome years of underperformance of the company.

Typically, large IT firms including Accenture, TCS, Cognizant, Infosys, Capgemini, HCL Tech & Wipro along with some mid-tier firms compete in the market place to win such outsourcing contracts. Sources in the know said that sales team focussing on winning such deals have been given the task to outsmart the competition.