Due to the prudent macroeconomic climate in major geographies such as the US and Europe, clients of IT services firms are directing their attention towards smaller deals. According to a report by ISG, the proportion of substantial awards exceeding $100 million (Rs 800 crore) in annualized contract value (ACV) has dropped to its lowest point in five years, constituting only 10% of deal activity in the July-September quarter.
In contrast to historical trends where mega awards, valued above $100 million, made up more than 20% of the total managed services ACV in the IT and business services sector, the third quarter of 2022 witnessed a decline to just 10%. Notably, awards falling within the $5 million to $19 million ACV range have experienced significant growth year-to-date, offsetting the overall impact of mega awards, as noted by ISG.
During the third quarter of the calendar year, there were only three mega awards with a combined ACV of $705 million, marking the fewest mega awards since 2017. While the sector is indeed growing, this growth is primarily driven by smaller awards, while mega awards remain relatively stagnant, according to the report.
Mrinal Rai, Principal Analyst at ISG, explained that in unpredictable technology cycles, clients prefer to invest in areas where they can witness quick results. This trend is evident across various industries. Rai anticipates that if the trend of focusing on smaller deals proves successful, some of these deals may eventually evolve into larger contracts.
Several factors contribute to this shift, including the desire for faster outsourcing results, the need to mitigate transformation risks, and the increasing trend of companies separating and re-bidding less successful components of larger transactions.
Despite the noted decrease in discretionary spending, Everest Group CEO Peter Bendor-Samuel emphasizes that overall demand remains surprisingly strong. Modernization work and related discretionary projects may face challenges in securing funding, but companies matured in their digital transformation agendas are expected to continue spending and evolving.
Ravi Menon, IT & Technology Analyst at Macquarie Capital, highlighted that even in a cautious spending environment, smaller firms serving as strategic vendors could benefit from vendor consolidation opportunities. The brokerage foresees a potential increase in large deal awards in the first half of fiscal year 2024 as macro uncertainties hopefully diminish by then.