Since an uncertain and inflationary environment prevails in the major markets of the US and Europe, software services providers are observing an increase in vendor consolidation arrangements by clients driven by the need to reduce costs.
“These are not one-off cases - there is a significant spike in client demand for cost-led consolidation deals, driven by inflation and economic challenges. Clients want costs taken out at speed and service providers such as TCS, HCL, Wipro, Infosys and Cognizant are all prominently competing for this business,” said Phil Fersht, chief executive, HfS Research.
He continued by saying that enterprises of Indian ancestry are fiercely competing with Accenture, Capgemini, and IBM Consulting for these consolidation deals.
Tata Consultancy Services (TCS), the largest software company in the nation, had stated in January that it anticipates an increase in client prudence will result in more cost optimization and vendor consolidation arrangements.
“We have won quite a few such deals across BFSI healthcare, manufacturing and telecom and we see many more in the pipeline,” CEO Rajesh Gopinathan told analysts during the third quarter earnings call.
After UK-based National Employment Savings Trust (Nest) abandoned its 18-year $1.8 billion IT transformation contract with French vendor Atos, the business recently took over the project. Although the company is still considering the new vendor, TCS, an existing vendor, is anticipated to be in the lead for the deal.
“The two most common reasons for competitive bids were the existence of previous contractual or pricing issues with the incumbent (service provider) and expanding scope of outsourced work. The third most common reason for a competitive bid was the clients' perception of poor delivery from the provider,” said a note by ISG on the recent uptick in vendor consolidation deals.
The estimated $160 billion in IT contracts that would be due for renewal in the first quarter of 2023 could go to Indian software exporters, according to sources.
In the midst of deteriorating macroeconomic conditions, this comes as multinational firms want to concentrate their technology investment with fewer providers and benefit from lower prices.
Although some IT service businesses run the danger of losing out on these bids due to the size and transformative nature of such transactions, analysts claim that Indian service providers like Tata Consultancy Services, Infosys, HCLTech, and Wipro are better positioned to take advantage of these chances.
The chief executive of HCLTech, C Vijayakumar, has added that the drive for vendor consolidation is accompanied by a need for a transformation in the IT operating paradigm that goes beyond cost savings.
“Customers are moving to a product-led operating model. They are looking at integrating infrastructure and application, both run and change. So I think providers who can lead this change have a better opportunity,” said Vijayakumar.
According to a report by brokerage ICICI Direct, TCS benefited greatly from vendor consolidation and aggressive engagement in clients' cost-optimization initiatives throughout the current macro-downcycle, which is predicted to extend through 2023.
Although LTIMindtree is anticipated to gain comparable advantages, ICICI Direct stated that Tech Mahindra is "at the wrong end of vendor consolidation due to bad execution" due to "drop in top-5 customer sales over past three quarters."
According to the most recent ISG Index statistics, IT services companies with less than $3 billion in annual revenue are expected to expand at a slower rate than larger companies than they did a year ago.
This shows that vendor consolidation may be a developing trend, combined with the predominance of expanding existing work.
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