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Cost compulsions to drive technology deals in 2021

 

Cogencis, Tuesday, Jan 19, 2021

By Nikita Periwal and Sai Ishwarbharath B

MUMBAI/CHENNAI – Adoption of technology to bring down cost of business will continue to be the largest driver of deals won by Indian technology service providers in 2021, overshadowing the slowdown in discretionary spending by companies.

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Even sectors moderately or heavily impacted because of COVID-19 are likely to spend on technology as they look to optimise costs, industry experts and analysts said. But these deal wins could be skewed towards certain sectors.

In a bid to achieve cost takeout, clients in retail, banking, oil and gas, automobiles and manufacturing have been driving most recent large deal wins announced by technology providers. 

'Cost takeout' uses technology to redesign the fundamental elements of a business to its lowest cost structure. The sale of captive centres to technology service providers, vendor and location consolidation are instances of this strategy, which is aimed at reducing costs 10-20%.

"Overall, client budgets are not increasing, but a few tier-I and select tier-II IT companies are getting the benefit of vendor consolidation," said Pareekh Jain, an outsourcing advisor and founder of Pareekh Consulting. "They are also becoming beneficiaries of the realignment of work between captives and service providers." 

This "paradox of large deals" is set to continue in 2021, and the industry will see more deals from sectors with higher pressure for cost takeout, Jain said.

In reportedly the largest deal awarded to any technology service provider in India, Infosys Ltd will undertake transformation of Daimler AG's technology operating model and infrastructure. 

Wipro Ltd, too, bagged a $700-mln deal spread over four years with retail giant Metro AG. The captive centre buyout will also add 1,300 existing employees of Metro across Germany, Romania and India to Wipro's payroll.

Bellwether Tata Consultancy Services Ltd was one of the first to call out the scope from such deals. The company has been steadily gaining market share in key areas because of consumers' preference for quality and security, Chief Executive Officer and Managing Director Rajesh Gopinathan had said in 2020.

The Tata group company has already announced it will acquire the captive technology units of Prudential Financial, Inc and Deutsche Bank AG.

Noida-based HCL Technologies Ltd also expects deals of this nature to be a "significant" source of deal wins in the near term, Chief Financial Officer Prateek Aggarwal said in a recent interaction with Cogencis.

A weakening dollar is a plus for Indian technology companies in these captive acquisitions, as it brings down costs.

"The potential dollar (depreciation)...may also impact the valuations of captives and acquisitions, and make the deals and targets cheaper," said Omkar Tanksale, an analyst with Axis Securities. Such captive deals would help companies in strengthening their footprint in Australia and a few European countries that have been difficult to break into, he said.

Top Indian technology companies have the ability to strike large integrated cost takeout deals because of the breadth of their offerings, Nomura Financial Advisory and Securities (India) said.

Once known as the back office of the world, the Indian technology space has come of age as it executes complex processes without compromising integrity while offering scalability.  End

Edited by Patricia Hou

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