Digital is changing the nature of deals for IT companies

As IT services companies are helping clients accelerate their digital transformation initiatives, the nature of deals is becoming more skewed towards shorter and smaller deals. Digital deals solve specific customer pain points and are therefore smaller and shorter than traditional deals that are larger and run for longer periods of time. 

 “Some customers want to introduce a big digital programme, so they break it into smaller programmes and then take it step by step. So, we see a higher percentage of smaller deals in the overall pipeline. As we see, I think there are lots of mid-sized and large deals as well in the pipeline. We have always enjoyed a very good renewal rate of over 90% in our services business, and it continues to be in that range,” C. Vijayakumar, CEO and MD, HCL Technologies told Mint in a recent interview.

During the ongoing challenges in the macro environment, shorter deals are being accepted by both clients and vendors. “In our view, clients prefer short tenure digital deals because they can easily track their return on investment with the launch of new platforms or programs in a phased manner. So, many clients do not opt to launch the entire transformation program at one go, given the higher risk,” said Ashis Dash, IT analyst, Sharekhan by BNP Paribas.

From an IT services providers’ point of view, short tenure deals are beneficial given the faster conversion of revenue. “Further, the vendor is able to push for price increase during signing of the next phase of the digital transformation program based on its understanding of earlier programs and complexities of the new deals, which would be beneficial in terms of margins for the IT services vendor,” added Dash.

The short-cycle digital deals typically span for about 6-12 months and clients usually choose the existing vendor for the execution of subsequent phases of its transformation program.

Historically, Indian IT companies have been organized to deliver large projects at low costs. However, digital projects have opposite characteristics. “These are smaller, complex projects where margins as a percentage of revenue are higher. Digital projects, like consulting projects, are also the gateway to downstream work, which presents larger and longer maintenance opportunities. Digital projects need to be viewed as the tip of the spear in IT, much like consulting projects,” said Abhisek Mukherjee, co-founder and director, Auctus Advisors.

During the March quarter, none of the Indian IT services companies bagged a mega deal worth $1 billion or more. To be sure, the share of digital revenue continues to rise for most Indian IT services companies. For Infosys, revenue from digital business grew 38.8% in constant currency from a year ago and contributed 59.2% to the total revenues for the quarter ended March. For HCL Technologies, digital or ‘mode 2’ business grew 31.6% in constant currency from a year ago and contributed 27.2% to the revenues for the March quarter. Some companies like Tata Consultancy Services and Wipro have stopped calling out digital revenues separately as the lines between traditional and digital offerings are getting blurred.