Reboot time is round the corner for Indian offshoring majors. Gloom and doom predictions started with bleak tech spending outlook for 2009. Next on cards is renegotiation of tech contracts. Analysts in touch with chief information and technology officers (CIOs and CTOs) of global corporate bigwigs say they are under pressure to restructure technology contracts soon.
This could spell trouble for Indian offshoring majors. While IT majors have cut growth projections and are prepared for red flags on fresh IT spending, none of them has yet seen any restructuring of contracts. Infosys CEO Kris Gopalakrishnan insisted, ?We are not seeing any trend towards decrease in price,? and TCS COO N Chandrasekaran echoed, ?We have not had a renegotiation of any price,? during earnings call with analysts last month.
But a lot seems to have changed since then. Today, leading IT research firm Gartner counts renegotiation with vendors as the second most important thing corporate bigwigs can do in a downturn, thus ranking it just behind a hiring freeze.
?Expect requests for renegotiations. With focus clearly on reducing expenses, vendors and service providers have to be prepared to make concessions,? says Mark McDonald, group vice-president and head of research in Gartner Executive Programs. He should know, having met several CIOs at Gartner?s recent symposium in Orlando. Tech buyers haven?t yet hit the panic button but they are looking for best buck for every dollar they have committed to vendors. He expects multi-sourcing deals to be the first ones to go through a price rationalisation exercise. If tech buyers are paying a lower price for a service to one vendor, they will expect other vendors to tune their pricing.
?As CIOs adjust to a shrinking budget, they will not want to leave any money on the table. There will be more price benchmarking studies,? agrees Everest group country head and principal, Gaurav Gupta, who helps several US firms, including one of the largest US banks, develop offshore vendor strategy.
Recent surveys also confirm the trend. More than two-third (69%) of businesses have renegotiated or plan to renegotiate existing tech contracts, and 65% have cut or plan to cut spending on contractors and consultants, according to a poll of 243 IT chiefs conducted in October by CIO Magazine. About 40% of businesses are decreasing their IT budgets, it adds. Gartner has also downgraded growth projections for IT spending in 2009 to 2.3% compared to previous prediction of 5.8%. IT spending cuts tend to trail the broader economy by two quarters, according to Gartner and we have all seen the US economy shrink last quarter.
Credit meltdown is squeezing tech buyers in many ways. Financing and loans that help companies buy computers; software and other tech products are getting tighter as defaults on loans are rising. According to estimates from Equipment Leasing and Financing Association, 0.86% of equipment loans were written off as losses in September compared to 0.48% a year earlier. IBM, which has its own financing arm, also confirms that there has been an increase in the number of customers looking for credit. Clearly tech buyers need help with financing and IBM, Oracle and Cisco are extending credit to customers to fill the void. IBM for instance has launched a new programme last month that offers loans at low market rates with no payment or interest due for 90 days.
Cash-rich Indian offshoring majors are also mulling some creative solutions to grease their sales through a tough economy. The idea is to smartly use the credit crunch to their advantage and offer tech buyers? shorter payback times and thus grow their market share at the expense of some of the less liquid competitors. ?Suppliers will need to get creative in structuring deals. Most of them are sitting on a pile of cash and clients have a crunch. They can underwrite or help finance some investments. They could also get creative in structuring the deals,? explains Gaurav Gupta.
Gupta proposes a slightly different solution for Indian service providers. Instead of taking a standard fee upfront for consulting, redesign of process and knowledge transfer, they should defer the payments by 18 to 24 months and ask for a bigger share of the productivity gain from the client. Large global suppliers and few Indian companies have already started looking at structuring their deals with little or no upfront fee. For Indian vendors, this means more skin in the game, thus making their story very appealing to clients who can be going through tough times. Outsourcers can expect to feel the belt-tightening as large banks and multinationals demand better value deals, but suppliers can turn it into an opportunity by extracting longer contracts on the back of such changes.
In the short-term, insiders expect the biggest setback for new growth engines like consulting and transformation projects rather than the bread and butter applications and maintenance. Transformation projects, however, might be back after a temporary pause as productivity gains and cost-cutting become business imperatives. People will not go in for many disruptive deals right now, but will try to pull more out of what they already have.
For the time being at least, no CIOs are likely to plan a massive rollout. Tech buyers are looking for the best ?gold plated solutions? that can sit on top of existing solutions. ?Vendors need to think of creative and innovative ways of getting more benefits from the huge platforms already rolled out. Not many big platforms are likely to be rolled out but there will be demand for tools and bolt-on solutions that can sit on top of what they already have. Top Indian suppliers have all invested in building these capabilities. They have the potential to get traction in the market,? says Gupta.
By now, most people are convinced that budgets will be delayed. ?Cloudy outlook for next year is slowing decision making and budgets might not be frozen by January,? says Infosys COO SD Shibulal. Even global tech majors are giving out mid-quarter updates. Intel, for one, will provide a formal mid-quarter update on December 4. ?Q3 played out mostly as we expected it to when we began the quarter. We saw some softness in September in the corporate segment while consumer was more seasonal. As we head into Q4, we see some mixed signs. We expect the corporate segment to continue to show some softness as IT spending gets rationalised in this macro environment,? according to Intel CEO, Paul Otellini.
And the slowdown is not restricted to the US. Figures released by sourcing advisory firm TPI show that in the third quarter of this year, companies in Europe, the Middle East and Africa, signed 56 contracts totalling almost ?3.44 billion ($5.9 billion), much less than the 75 contracts totalling ?11.59 billion signed in the previous quarter.
As painful as the developing downturn may seem, it isn?t another 2001 and tech economic woes are not expected to rival dot-com burst. IT budgets were ?slashed from mid-double-digit growth to low single-digit growth? during and after the 2001 recession. ?This is completely different from the dotcom bubble. Tech spending was scaled down because most companies had over-invested in tech. Today, it is an economic situation, where credit squeeze is much more pervasive. IT is better placed as it is part of the solution that can change cost structure and improve productivity,? explains Marc. Many others in the industry agree.
Enterprise technology, Forrester CEO George Colony writes in his blog, might have been ?nice to have and (eminently cut-table) back in 2002, it now sits at the centre of companies? operations. Technology has become markedly more pervasive in that time?it?s the air we breathe and the water we swim in,? he says. According to him, tech had a long way to fall; as tech spending in 2000 in the US was up 12%?there was fluff and fat everywhere. ?Users of technology are far more disciplined and have cut out the nonsense. So yes, growth will slow, but it won?t fall off a cliff?, he stresses.
IT has been able to shift its position from a back-office cost centre to an active partner in the business. IT is now embedded in running all aspects of the business and often employs multi-year IT programs aligned with the business, which are more difficult to drop or cut in the short-term.
Lesser budget is also likely to lead to greater accountability and hence shorter review cycles. And outsourcing and offshoring, which stands at about 18% of the total IT spend today, could be used as lever to grow as crunch deepens.
?The next few quarters will test service providers? ability to manage business rather then being just contract managers,? sums up Mark. A greater discipline on tech spending could see disruption of several business models. And onus is on offshore majors to ensure that they are part of the cost-cutting solution and not a victim of the rationalisation exercise.