it sector consolidation deals: IT sector logs big rise in consolidation deals from firms

it sector consolidation deals: IT sector logs big rise in consolidation deals from firms

Software service firms are witnessing a spike in vendor consolidation deals by clients driven by the need for reducing costs as an uncertain and inflationary environment persists in the major markets of the US and Europe.

“These are not one-off cases – there is a significant spike in client demand for cost-led consolidation deals, driven by inflation and economic challenges. Clients want costs taken out at speed and service providers such as TCS, HCL, Wipro, Infosys and Cognizant are all prominently competing for this business,” said Phil Fersht, chief executive, HfS Research.

He added that companies like Accenture, Capgemini and IBM Consulting were competing aggressively with the Indian-heritage firms for these consolidation deals.

The country’s largest software firm Tata Consultancy Services (TCS) had said in January that it sees an uptick in client caution leading to more cost optimization and vendor consolidation deals.

“We have won quite a few such deals across BFSI healthcare, manufacturing and telecom and we see many more in the pipeline,” CEO Rajesh Gopinathan told analysts during the third quarter earnings call.

Recently, the company has taken over a project for UK-based National Employment Savings Trust (Nest) after it terminated its 18-yr $1.8 billion IT transformation contract with French provider Atos. While the organization is still evaluating the new vendor, TCS, as an existing vendor is expected to be a front runner for the deal.

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“The two most common reasons for competitive bids were the existence of previous contractual or pricing issues with the incumbent (service provider) and expanding scope of outsourced work. The third most common reason for a competitive bid was the clients’ perception of poor delivery from the provider,” said a note by ISG on the recent uptick in vendor consolidation deals. Indian software exporters could win a dominant share of the estimated $160-billion worth of IT deals that will come up for renewal in the first quarter of 2023, ET had reported in December 2022.

This comes as global corporations look to consolidate technology spending with fewer vendors and reap the benefits of better pricing amid worsening macroeconomic conditions.

Indian service providers like Tata Consultancy Services, Infosys, HCLTech and Wipro are better placed to tap these opportunities although some IT service players stand the risk of losing out these bids due to the large and transformative nature of such deals, say analysts.

HCLTech chief executive C Vijayakumar had told ET that the vendor consolidation demand is coupled with a need for a change in the IT operating model beyond just cost benefits.

“Customers are moving to a product-led operating model. They are looking at integrating infrastructure and applications, both run and change. So I think providers who can lead this change have a better opportunity,” said Vijayakumar.

Brokerage ICICI Direct stated in a report that TCS was a big beneficiary of vendor consolidation and proactive participation in clients’ cost optimization agenda in the current macro downcycle, which is expected to last through Calendar year 2023.

Although LTIMindtree is expected to see similar benefits, in the case of Tech Mahindra ICICI Direct noted that “decline in top-5 client revenues over past three quarters signifies that TechM is at the wrong end of vendor consolidation due to weak execution.”

According to the latest ISG Index data, IT services firms under $3 billion in revenue are growing at a forecasted rate that is slowing relative to larger firms, compared to one year ago.

This, along with the prevalence of expansion of existing work, suggests that vendor consolidation may be a growing trend.

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