Infy, Wipro Ready to Pay Big to Win Deals

War for mega deals comes at a time when In­dia’s $160b IT sec­tor is fac­ing slow­est rev­enue growth in a decade Tra­di­tion­ally, In­dian cos have stayed away from $500m-plus deals

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Ben­galuru: In what maybe a sign of the es­ca­lat­ing war for large deals, In­dia’s top out­sourc­ing firms like In­fosys and Wipro are in­creas­ingly more open to mak­ing large up­front pay­ments while bid­ding for large deals that of­fer as­sured rev­enues. This comes at a time when In­dia’s $160-bil­lion IT in­dus­try faces its slow­est rev­enue growth in nearly a decade.

Ac­cord­ing to ex­ec­u­tives fa­mil­iar with th­ese plans, In­dian out­sourc­ing firms have tra­di­tion­ally stayed away from large deals (over $500 mil­lion) which in­clude the takeover of cus­tomer as­sets in­clud­ing data cen­tres or de­liv­ery cen­ters.

In an in­ter­view last week, Wipro CEO Abidali Neemuch­wala in­di­cated that Wipro would not hes­i­tate to go af­ter large deals us­ing up­front pay­ments if the op­por­tu­nity is large enough. “There are dif­fer­ent kind of deal struc­tur­ings that hap­pen -- if there is an as­set that gets trans­ferred by the cus­tomer, then we may make an up­front pay­ment for that. It’s not just quan­tity of rev­enue, but it’s about qual­ity of rev­enues,” he said.

In­fosys CEO Vishal Sikka said while In­fosys does not make such in­vest­ments with ev­ery large deal, some deals might re­quire such pay­ments.

“Only when it comes to the qual­ity of the work we’re get­ting, and the na­ture of the work we’re get­ting,” said Sikka. This strat­egy is re­flect­ing in their num­bers. In 2015-16, In­fosys, for in­stance, spent nearly .₹ 400 crore on con­tract costs, ac­cord­ing to their lat­est quar­terly fi­nan­cials.

In com­par­i­son, de­ferred con­tract costs stood at zero in the pre­ced­ing year. To be sure, mak­ing up­front cash pay­ments to win large deals is not a new phe­nom­e­non.

Glob­ally com­pa­nies like IBM, HP and Ac­cen­ture have been do­ing this for years, and even In­dian soft­ware ex­porters such as Wipro and HCL Tech have caught on to this prac­tice and fol­lowed suit over the past five years. In 2012, IBM beat out In­dian ri­vals such as In­fosys and Wipro and paid well over $100 mil­lion up­front in cash to win a $1-bil­lion out­sourc­ing con­tract from Mex­i­can ce­ment gi­ant Ce­mex SAB. How­ever, what has changed over the past 3-4 quar­ters is the in­creased in­ten­sity from some large firms such as TCS and In­fosys, who are now find­ing it harder to win more new busi­ness from tra­di­tional ar­eas of out­sourc­ing with.

For in­stance, in Fe­bru­ary, HCL Tech re­cently bought out the ex­ter­nal IT busi­ness of Volvo, which in the process un­locked a 5-year out­sourc­ing deal worth about $1.75 bil­lion. In 2014, Wipro also won a sim­i­lar $1-bil­lion con­tract from Canada’s ATCO af­ter buy­ing out the com­pany’s cap­tive IT arm.

Some of that ag­gres­sion is clearly pay­ing off -- for in­stance, In­fosys won at least 10 large deals with to­tal con­tract value of over $50 mil­lion dur­ing this pe­riod, more than any other top-tier ri­val, ac­cord­ing to data from out­sourc­ing ad­vi­sory and re­search firm ISG.

While the mega deals are be­com­ing less and less, there are some busi­ness takeover deal ac­tiv­ity you see in that range-where you have to make sig­nif­i­cant up­front pay­ments. It typ­i­cally in­volves buy­ing an as­set or tak­ing over de­liv­ery cen­tre(s) with a large ticket long term out­sourc­ing deal com­mit­ment. Th­ese tend to be more like busi­ness deals," said Di­nesh Goel, part­ner and In­dia head at ISG, adding that the down­side to such deals is the fact that mar­gins may come un­der pres­sure at least in the first cou­ple of years.

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