IT contracts value shrinks further in Sept quarter

ISG index says lowest number of mega contracts signed till end of Sept this year were lowest in last decade

Indicating that the shrinking sizes of IT outsourcing contracts are going to stay for some time, fresh data from IT outsourcing advisory services firm ISG has indicated that despite having record number of deals getting awarded till the end of September quarter of 2015, the annual contract value (ACV) of those were at least 11 per cent lower when compared with the same period last year.

Till end of September, a record number of 1094 contracts were signed, eight per cent higher than the same period last year, while the ACV was down 11 per cent to $16.8 billion. Only in the July-September period (Q3CY2015), there was a 19 per cent YoY jump in the total number of deals to 344 while the ACV fell by 11 per cent to $5.6 billion.

This indicates a change in the buying behavior of the global clients with the increasing adoption of digital technologies as compared to roping in partners to award multi-year multi-billion dollar end-to-end outsourcing contracts.

"The market trend is continuing toward smaller deals, as enterprises increasingly buy specialised services from smaller, niche providers, and avoid getting locked into big, long-term contracts to maintain the flexibility they need to take advantage of fast-changing technologies, lower pricing and evolving operating models," said John Keppel, president and partner of ISG.

According to the ISG Outsourcing Idex, during the July-September period, only five mega-relationships (contracts valued at more than $100 million annually) were signed, bringing the year-to-date total to 14, the lowest such figure through three quarters in the last decade. At the same time, the contract counts and ACV for deals valued at less than $40 million both reached record highs in the first nine months.

Most of the large Indian IT outsourcing players are also seeing similar trend where smaller deals but with larger numbers have taken the centre stage as compared to the earlier period. "The number of large, half a billion dollar kind of deals that we see, are coming down. We see more number of smaller deals," T K Kurien, CEO of Wipro had told Business Standard last week, post the company's earnings conference.

"ISG management highlighted the increasing trend of digital adoption where smaller companies are leading the way (IT spending almost increased fivefold in past five years) with IT budgets of large corporations are moving at a slow pace," analysts Bhuvnesh Singh and Saurabh Mishra of equity research firm Barclays wrote in a report released on Monday. "This in turn impacts service providers as they need to invest more in sales to reach out to these smaller corporations," they added.

Among others, the ISG report found that the growth during the quarter predominantly came from Americas, by far the largest market for the IT services firms. Verticals like manufacturing, healthcare, retail and transport led this growth. In contrary, Asia-Pacific region reported one of the weakest phases, primarily due to softness in Australia, New Zealand and Japan region. EMEA (Europe, Middle East and Africa) produced $2.7 billion in ACV for the quarter while contract counts rose seven per cent to 139.

It was the eighth time in the last nine quarters the region has topped the $2.5 billion ACV mark. In Asia-Pacific region, the ACV was down 34 per cent year-to-date due to weakness in Australia, New Zealand and Japan.

"Looking forward, we expect an active finish to this year and a strong start to the next, with many awards in the Americas and EMEA. But even a robust fourth quarter will not be enough to close the current year-to-date ACV gap," said Keppel. "We expect the industry to fall short of 2014 levels by some seven per cent to 10 per cent."