IT firms stand to gain in 12-18 months as clients look to hike outsourcing budget: Report

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Over the next 12-18 months, enterprises are likely to increase their outsourcing budget in the areas of digital and cloud, according to a recent report. This, coupled with remote working, could provide an impetus to outsourcing, where IT services firms stand to benefit.

The report, Future of Technology Services – Navigating the New Normal, by IT industry body NASSCOM in partnership with McKinsey, noted that more than 70 percent of enterprises are looking at either increasing their outsourcing budget or prioritizing projects in the area of cloud and digital channels over the next 12-18 months.

This has huge opportunities for the Indian IT services industry, said UB Pravin Rao, COO, Infosys and Chairman, NASSCOM.

This is far from the end of the IT industry as some had predicted,  and the industry continues to be resilient,  NASSCOM President Debjani Ghosh, addressing the media virtually, pointed out.

Indeed. At the start of every crisis, people predict the end of the IT services industry and every time, it is one of the first sectors to bounce back, Ashok Soota, founder, Happiest Minds, told Moneycontrol during an earlier interaction in September. According to him, COVID-19 would be no different.

Indian IT has outperformed analysts’ expectations in Q1 and Q2, Rao said, adding that he expects the momentum to continue in the coming months as well.

IT stocks were the biggest gainers during the pandemic. Stock prices of the top four Indian IT services firms – TCS, Infosys, Wipro and HCL Tech -- increased over 50 percent on an average between April and September 2020.

This was the result of the industry’s agility to shift to the new working model in a matter of two weeks for the majority of the 50 lakh employees in the sector and cater to the changing needs, bagging large deals even as the pandemic caught on.

Salil Parekh, CEO, Infosys, during the company’s annual general meeting in June, said that its clients are fast tracking their digital transformation projects. The report points out the expectation is to complete the digital transformation in 12-15 months instead of 3-5 years which is the norm.

To take on that journey, enterprises, the report said, are looking at consolidating their vendor partners and also are selective about those with expertise. According to the report, about 60 percent of the companies are looking to consolidate their number of partners, whereas 23 percent will selectively add specialist partners.

Noshir Kaka, Senior Partner and Global Leader, Analytics, McKinsey & Company, said those with strong expertise are definitely winning, with quality gaining significance on the back of COVID-19.

Close to 50 percent of leading Tier 1 and Tier 2 service providers, the report said, saw a significant increase in their deal pipeline. TCS and Infosys reported one of the largest order wins for a quarter in Q2 FY21. Infosys, for instance, bagged a major deal from US wealth management firm Vanguard. Wipro won a multi-year automotive software engineering deal with Marelli.

Sectors like healthcare and life sciences, telecom and hi-tech, according to the report, are high-growth areas that will see 2-5 percentage point CAGR growth in FY20-22. Banking, logistics, hospitals and utilities will have 0 to 1 percentage points CAGR growth. Aerospace and defense, automotive, heavy engineering, travel and hospitality and non-grocery retail will see a decline of 2-8 percent CAGR.

As witnessed in the last two quarters, companies are already focusing on sectors that are driving growth for them. Karthikeyan Natarajan, COO, Cyient, said in a recent interaction that the company is looking to do more in med tech, which was one of the fastest growing areas for the firm.

However, there are challenges too.

With the focus on digital, Rao said that some work has to be done by the industry in terms of investing in reskilling the employees in the latest skills.

The report has also pointed out that companies need to adopt automation for their internal processes, and reprioritise offerings where the spends are coming in quickly, to get the most out of the situation. The areas where enterprises are spending include cybersecurity, cloud and remote enablement.