You are here: Home » Companies » News
Business Standard

IT service deal wins up but incremental revenue remains area of concern

HCL signed 27 new deals in the quarter as compared to 15 in the previous quarter

Romita Majumdar  |  Mumbai 

IT services, IT firms

Deal wins in the IT services space have clearly gone up, and so has the total contract value (TCV) of large deals, but this is not helping service providers in their growth.

According to experts, the reason is that clients are pushing for vendor consolidation, which means all of them are competing for the same business pie and are ultimately snatching each other’s clients. Besides, in their hunt for large clients, these have not been able to track the revenue slippages due to loss of smaller clients.

India's second largest IT services provider Infosys, for example, signed deals worth $1.12 billion, the highest ever TCV signed by the firm in last 15 quarters, while it reposed strong faith in the demand environment. Tata Consultancy Services (TCS), which signed deals with TCV worth $4.9 billion, said the company was seeing robust contract signing, quarter after quarter. Wipro said the company's order book in the quarter grew in double digits as compared to the previous year, while the number of large deals has significantly risen.

signed 27 new deals in the quarter as compared to 15 in the previous quarter. The trend was similar for most other large and mid-size

However, in terms of quarter-on-quarter incremental revenues, TCS added $79 million, followed by Infosys that added $26 million. For HCL, the addition during the quarter was just $16.5 million, while for Wipro, it declined $36 million.

"During tougher times, there seems to be overwhelming focus on managing the larger, anchor clients and/or winning new deals and RFPs," noted JP Morgan's senior executive director, Viju George, in a report. “The result is that attention towards several other existing clients can suffer. This slippage often creeps in inconspicuously. Our research finds that this slippage especially occurs with clients of annualised revenue run-rates of $20-60 million, with a tangible overall impact."

The report also cautioned investors to not turn positive on firms just because they are winning new large deals of the kind have elaborated upon, during the recent quarter results. "While there is a lot of discussion on the fresh bookings and TCVs, they need to continue focus on existing clients.”

ALSO READ: TCS closes in on IBM as the world's most valued IT services company


According to a recent report by Kotak Institutional Equities, while statements made by large Indian after their June quarter results indicate strong deal momentum, there is, at the same time, no standard definition of bookings, which makes it more difficult to gauge the extent of benefits.

For example, conversion of an existing time and material (T&M) relationship into multi-year service contract may provide a strong boost to TCVs, but may add little to annual revenues. Indian IT firms' engagement model with the clients broadly comprises two elements namely T&M, and fixed price or element-based projects.

"Revenue flow from fixed price projects is clearly defined and carries certain elements of predictability. Run-the-business has increasingly moved to fixed price contracts. However, estimating revenue flow from most T&M contracts is a challenging task, given the flexible nature of resourcing as well as lack of a compensation clause in case of shortfall or cancellations,” noted Apurv Prasad, analyst Kotak Securities.

The report also says that when clients consolidate multiple programmes across vendors into one single vendor, the cumulative deal value that the new vendor wins will be lower than the pre-consolidation revenue of all vendors put together. However, no vendor is currently accounting for those negative order bookings.

First Published: Sun, August 12 2018. 05:30 IST