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Indian IT faces shorter deal durations in rich neighbourhoods

The rapid obsolescence of specific technologies and uncertain macroeconomics in wealthy regions have shortened deal tenures for the $250-billion outsourcing industry in India.

HCLTech and Birlasoft have reported that long-term deals now end in four years instead of the usual 10-12 years.

Experts note that while clients still prefer tenured deals over large one-time expenditures, the deal periods are now shorter or include stage-gated tenures in India.

For example, Infosys announced large deals last fiscal year with Liberty Global, Danske Bank, and BP, each lasting five to six years. The Liberty Global deal spans an initial five-year period, with an option to extend for three more years. Similarly, the Danske Bank deal is for five years, with an option to renew for up to three additional years.

Hansa Iyengar, UK-based research firm Omdia’s senior principal analyst for enterprise IT, said: “A quick look shows that more than two-thirds of all contracts over $150mn in TCV that were signed in the past 2 years have a tenure of 5 years or less.” 

Cognizant’s large deal with Gilead is set for five years, with a total contract value (TCV) of $800 million. Meanwhile, HCLTech’s deal with Verizon lasts six years.

C Vijayakumar, CEO and MD of HCLTech, in the Q4 FY24 earnings call, said: “The large deal (Verizon) was a six-year deal, but other than that, the large deals have mostly had a three-year tenure, and the $9.8 billion (Total Contract Value) has a mix of small deals and large deals, and large deals average will be three to four years and small deals are a much shorter duration.” 

High Volatility

Angan Guha, CEO and MD of Birlasoft, said: “Long-term deals are getting renegotiated. The volatility is very, very, very high.” Guha added, “I don’t think there are deals more than five years anymore. Quite frankly, in today’s times, a long-term deal is a three-year deal.” 

He pointed out that one downside of these large deals is that after one or two years, clients return to negotiate and renegotiate, which shortens the deal’s effective duration. “So, from my perspective, a long-term deal is anywhere between two to three years,” he said. He added that frequent market changes also force clients to renegotiate more often.

Guha added, “We are signing deals not more than two to three years. That’s important for us because we want to be very focused on executing for the client in the year, and if we can do a good job on doing that, then we will take one year at a time and to me personally for a company of our size, that’s a much better option than signing a 10-year deal and then suddenly one year later, we face problems.” 

Outsourcing expert Pareekh Jain, chief executive at EIIRTrend, said, “There are more short to medium-term deals in the market for three reasons – technology is changing fast, and clients don’t want to tie up a technology for a long time. The second reason is clients want quick ROI (return on investments). And finally, macro uncertainty like inflation and high interest rates dissuade clients from a long-term relationship with IT vendors.” 

Jain mentioned that long-tenured deals always carry risks, as seen last fiscal year when two major deals involving TCS and Infosys were terminated. While TCS secured a few long-term deals lasting over nine years, it lost a 10-year deal with Transamerica. Similarly, Infosys signed a 15-year AI deal with a global client last year but lost it within a quarter.

Iyengar said, “Most transformational deals signed today fall in the 3-6 year time frame compared to 10+ years because innovation cycles are shorter and waiting for 10 years is no longer a luxury any business has.”

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