Exclusive: IT industry in recovery mode; new deals offset budget cuts by clients

While most sectors are struggling to bring back normalcy to their businesses as economies reopen, the IT sector is already recovering as firms spend to enable efficiency, digitisation, and cost-consolidation.

Data collated for CNBC-TV18 by global IT consultancy major Everest Group shows that the IT industry is seeing a recovery due to the new outsourcing spends by clients across sectors barring the severely distressed ones.

"Recovery has already started due to new outsourcing spends. However, for some distressed industries such as transportation and medical devices, this will start happening not earlier than Q1 CY2021," said Abhishek Singh, VP, Everest Group.

The managements of TCS and Tech Mahindra have indicated to CNBC-TV18 that green shoots will start to appear by September, meaning that the balance sheet should (for the larger IT companies) start reflecting a turnaround by the quarter ending March 31, 2021.

New deals also mean that the hit on IT companies by budget cuts is getting offset. When asked about the discretionary spends slashed for CY20, Everest Group said that the cut is between 10-25 percent. However, the group also added that a lot of budget cuts are being achieved through internal cost take-outs.

"A lot of budget-slashing is being achieved through internal cost takeouts which are leading to more outsourcing related discussions. Hence, the net impact on spending will be 3-5 percent (negative)," said Singh. The deepest budget cuts are being implemented by clients in APAC, India, Australia, and New Zealand.

The big worry when COVID-19 pandemic and its impact hit the corporate world was price discounts being sought by clients which could hit margins. Everest Group says that clients asked for discounts during March and April.

"During March-April this number varied between 20-25 percent. However, these discount discussions have become rare because of creative constructs by vendors (balance sheet financing, billing abeyance, zero-cost implementations by ISVs, etc.)," said Singh. The sectors that have asked for price discounts from their IT vendors are transportation, energy, and resources.

Another concern for IT vendors has been vendor consolidation. Everest Group finds that the impact of vendor consolidation was interim. "Longtail (staffing vendors) were initially impacted by this crisis. Their ability to staff got impacted by the crisis. Large vendors are agreeing to interim discounts in return for an expanded portfolio (long-tail) led to this scenario. However, most of that was interim and has resulted in a bounce-back," explained Singh.