Recently, IT majors Infosys
signed multi-year engineering services deals with Rolls-Royce and Marelli, respectively.
This comes at a time when the engineering sector, such as the automotive space, had taken a significant hit at the back of COVID-19. According to experts, this could be the very reason why IT firms are in demand.
In the backdrop of COVID-19, global clients are looking to cut down costs and accelerate digital capabilities, making IT services firms a strategic partner to them, analysts added.
What is happening in the engineering services space?
When the pandemic struck, while demand for IT services increased, the engineering services segment took a beating. Global engineering players in the areas of manufacturing and automotive paused their tech spending, such as research and development, which are long-term investments.
Firms such as L&T Technology Services (LTTS), Cyient and KPIT Technologies that are in the engineering services saw their growth decline.
However, the demand in the digital space, which includes cloud, continues to grow. Karthikeyan Natarajan, COO, Cyient, a Hyderabad-based IT services firm, said clients had to invest in digital capabilities to drive efficiency and cut down costs.
For instance, some manufacturing firms, which had dependency on China, were looking for alternatives and were tapping into analytics capabilities to build a resilient supply chain model, according to an IT executive with an engineering services firm.
Amit Chadha, Deputy CEO, LTTS, said during a recent earnings call: “There are multiple deal discussions in the pipeline, and customers are investing in digital manufacturing, engineering, analytics and AI enablement.”
All these were driving demand for Indian IT services.
How are the opportunities for Indian IT firms?
There are a couple of trends that are driving demand for IT firms, some of them driven by COVID-19.
Healthcare is one of the fastest growing areas right now in the engineering services firms. Executives said that there are huge investments coming into the medical devices and pharmaceutical space, which IT firms are looking to tap into.
Natarajan of Cyient said that the company is looking to play a larger role in healthcare engineering services, including diagnostics and vaccine distribution, in the areas of cold-chain monitoring.
Cost-cutting is definitely another area where the demand is from. Pareekh Jain, founder, Pareekh Consulting, which tracks the engineering services industry, said that at the back of COVID-19 and increasing software components, global companies are looking at strategic partnership with firms.
Investing in tech in-house would prove to be expensive and outsourcing is a way to cut down costs for these global players, he added.
Look at the Rolls-Royce deal with Infosys. Through this partnership, the automotive major will shift a significant share of its engineering centre capabilities in aerospace to Infosys. Through this, Infosys will offer its R&D services with advanced digital capabilities to Rolls-Royce.
Jasmeet Singh, Executive Vice President and Global Head of Manufacturing,
Infosys, in a statement
, said that the centre would help expand the firm's existing capabilities in turbomachinery and propulsion that are currently delivered through a network of engineering centres in Mysuru, Baden, and Karlovac.
Peter Bendor-Samuel, founder, Everest Group, an IT consultancy firm, says this is driving up ticket sizes and duration, further driving growth.
Wipro won a large multi-year deal from Marelli
in September, which analysts pegged to be $250 million, a large deal from the engineering services point of view. Wipro would use its EngineeringNXT framework to establish a software engineering factory for Marelli.
Another reason driving the need is talent. Bendor-Samuel explained that talent shortage in engineering services is another reason why Indian IT firms are in demand.
“The easiest way for most firms to get at this labour pool is through the third market services vehicle. We expect that this shortage will continue to grow and deepen further, driving growth in this sector,” he added.
This includes talents in the AR-VR solutions, cloud, automation, 5G and analytics. Most firms have stepped up their reskilling efforts and are hiring to cater to this growing demand.
This comes with its own challenges. While there is an increased interest in partnering with Indian outsourcing majors, uncertainty continues and decision cycles are longer.
Compared to April, when clients took a step back, investments are slowly coming back. “However, we are seeing delayed and longer decision cycles on larger deals,” Chadha added.
Analysts also explained that even in larger deals, larger IT firms like Infosys and Wipro will have an edge, compared to smaller players, given the scale with which these firms operate.
Jain explained: “Unlike smaller firms, larger IT players have presence in various geographies that makes it easier for these firms to cater to the client's needs.”