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Rapid obsolescence of specific technologies and uncertain macroeconomics in the world’s richer neighbourhoods have shortened the deal tenures for India’s over $250-billion outsourcing industry.
At least two companies – HCLTech and Birlasoft – have gone on record to say that from the usual 10-12 year deals earlier, long-term arrangements are now ending in four years. Earlier, the tenures ranged between 10-12 years.
Experts said while clients prefer tenured deals to one-off large discretionary spending, the time window is shorter or the arrangements are coming with stage-gated tenures.
For instance, among large deals (publicly announced in the last fiscal) of Infosys – Liberty Global, Danske Bank and BP — have tenures of five to six years. The Liberty Global deal with Infosys is for an initial 5-year agreement, with an option to extend another three years and more. Even the Danske deal has a period of five years, with an option to be renewed for up to another three 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.”
While Cognizant’s large deal partnership with Gilead is meant for five years for a total contract value (TCV) of $800 million, HCLTech’s Verizon deal spans 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, 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.”
On the downsides of such large deals, he said that right after one or two years, clients would be back on the table to negotiate and renegotiate the deal, and then it doesn’t remain a long-term deal anymore. “So from my perspective, a long-term deal is anywhere between two to three years,” adding that frequent changes in the market also compel clients to come back to the table to renegotiate.
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.”
There is always a risk with long-tenured deals as was seen last fiscal when two mega deals of TCS and Infosys got terminated, Jain added. While TCS bagged a couple of long term deals that spanned over nine years, it also lost one Transamerica deal that was meant for 10 years, last fiscal. Similarly, Infosys, which signed a AI deal with a global client last year for a 15-year period, 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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