Informist, Wednesday, Feb 2, 2022
By Sai Ishwarbharath
CHENNAI – What do deal sizes in the Indian information technology sector have to do with employee attrition?
If you say ‘very little’, think again.
Worried by the impact that record-levels of employee churn can have on the operations of IT services providers, some clients are beginning to break up larger deals into smaller chunks to test their providers’ execution ability before entrusting them with their full faith, and work.
“The shorter projects are a reflection of intense nature of the talent shortage versus the pre-pandemic market," said Peter Bendor-Samuel, chief executive officer at global information technology research firm Everest Group.
"These projects take less time and money to sell, as they are a reaction to immediate need and not long-term planning."
These conditions of shorter projects will persist and potentially intensify in 2022 as well, Bendor-Samuel said.
Global IT consultancy and research firm ISG said smaller deals have dominated the market in calendar year 2021 during its Oct-Dec quarter update. Just 12% of annual contract value of deals came from mega deals of over $100 mln, down from 20% in 2015. Meanwhile, the number of deals in the $20 mln-$50 mln category is increasing, it added in its quarterly update call earlier this month.
Some of their concerns stem from the sharp increase in employee turnover at major Indian IT and outsourcing firms.
Attrition, fuelled by employee resignations, has spiked in the last few months in the Indian IT sector, coinciding with the post-COVID ramp-up and expansion of corporations across the world that has driven more business to IT services majors.
The attrition numbers have stayed elevated at 15.3-22.7% for Tata Consultancy Services Ltd, Infosys Ltd and Wipro Ltd for Oct-Dec.
These numbers don’t give the full picture, given that the trailing 12-month numbers are currently being held down by the relatively lower rates of attrition in the early part of 2021. The rates may cross 30% mid-year once this moderating effect wanes.
QUALITY & SPEED
A second, but related, factor is that clients want to see how competent a provider is before sending more work their way. A client awards a smaller order initially and evaluates the prototype, efficiency and results before awarding other orders.
"Clients generally want to see how we perform...but total contract value of all deals won is almost the same (sequentially)," said Amit Chadha, managing director and CEO of L&T Technology Services, to Informist recently.
L&T Technology Services won three orders between $20 mln and $45 mln each from a US-based auto major this financial year instead of a single $95 mln order. The same is the case for a consumer packaged goods client where the company is confident of winning multiple orders of $5 mln to $10 mln each in the next few quarters after bagging an initial contract of $10 mln in Oct-Dec.
Another reason for clients breaking mega deals into smaller bits is a perceived ease of execution and catering to their immediate needs on priority basis.
"Smaller deals are driven by enterprises’ need for speed,” said Kotak Institutional Equities in a report. “Enterprises are breaking down transformation related projects into smaller chunks creating opportunities for mid-size providers."
Enterprises are focused on their immediate needs to move infrastructure and processes into the cloud and are pushing for rapid implementation compared to the pre-pandemic days, said Phil Fersht, founder and chief analyst at IT consulting firm HfS Research.
RISE OF DIGITAL
Another factor contributing to the rise of smaller deals are the increasing shares of digital projects, such as analytics and digital marketing.
Such digital projects now account for 50-60% of total deals for most Indian players while legacy IT services such as mainframe and software maintenance form the rest.
The deals are shorter but it is not in a negative connotation because the digital transformation happens in spreads, said Venu Lambu, the executive director and president of global markets at Mindtree Ltd.
"There are more frequent milestones than any classical (legacy) IT projects," he said in a post-earnings call to Informist.
The shorter and smaller deals keep project iterations and client engagements more continuous than ever before.
Smaller and shorter deals are expected to be the new normal at least till the demand for "immediate" need for digital transformation and cloud migration deals taper down along with attrition issues also getting resolved. End
US$1 = 74.91 rupees
Edited by Michael Correya
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