IT services firms are witnessing a significant rise in deals up to $30 million, as clients are prioritising immediate return on investment (ROI), adopting AI technologies, and as companies across geographies such as the Middle East and Asia-Pacific are increasingly looking to improve their digital infrastructure.
Industry giants like Infosys, Tata Consultancy Services, Wipro, and LTIMindtree have all observed a noticeable increase in the volume of smaller deals.
Infosys’ chief financial officer, Jayesh Sanghrajka, said after the September quarter earnings that the company saw a “double-digit increase” in deals below $50 million during the quarter.
“Since discretionary spend was muted and cost-cutting was prevalent, companies are now looking for immediate ROI. This has resulted in smaller deal sizes,” said Pareekh Jain, founder of Pareekh Consulting and EIIR Trend.
Additionally, Jain said that companies are testing AI in incremental phases, further reducing the size of deals. “People are not committing to large AI projects yet, instead they are opting for smaller phases to see tangible results before proceeding”.
Further, TCS’s CEO, K Krithivasan, emphasised the importance of cost optimisation and vendor consolidation among clients.“Globally, clients continue to prioritise efficiency through cost transformation programmes, and demand for discretionary deals with low immediate ROI remains relatively subdued,” he said.
Similarly, Infosys’ CEO, Salil Parekh, said: “The type of large deals is still much more on cost and efficiency, and not so much on digital transformation”. This reinforces the notion that while smaller deals are on the rise, large transformation projects are still lagging behind, mainly due to uncertain AI ROI and cautious spending.
This trend was also seen in mid-sized IT services companies such as Mphasis and Coforge. Mphasis CEO, Nitin Rakesh, said that they observed large deals are being put on hold as companies remain in a “wait and watch” mode regarding AI ROI, while the company is seeing a high inflow of deals valued between $1 million to $10 million.
“We have seen $1 million to $10 million deal activity burst. And even this (September) quarter, the pickup in small deal volume, which typically is 0 to 1 year in consumption, is really what’s driving the overall TCV (total contract value) number,” he said.
Coforge also reported an increase in shorter-term projects aimed at immediate outcomes. The company’s deals valued above $10 million rose to 26 in the September quarter from 23 in the previous quarter. Additionally, deals in the $1-5 million range increased to 128 in Q2, compared to 118 in Q1.
Smaller Have Limited Impact on Margins
Despite the growing volume of smaller deals, these are unlikely to contribute significantly to margin expansion for IT firms. Pareekh Jain pointed out that the impact on margins largely depends on the nature of the deal.
“Short-term deals focused on cost optimisation could be margin dilutive, especially if they involve cost takeout. However, deals centred on AI and new digital capabilities might offer better margins.” Yet, overall, the smaller deals are seen as a way for companies to continue their work while waiting for discretionary spending to return.
Brokerages have echoed this sentiment. They note that while small deal momentum is increasing, it may not offer the same margin benefits as larger deals, especially those tied to cost transformation projects.
HCLTech’s CEO acknowledged that the absence of mega deals contributed to a “flattish net profit” this quarter, further underscoring the impact that deal size can have on financial performance.
This was also evident with larger IT firms such as Infosys and HCLTech increasing their revenue guidance for fiscal 2025, while retaining their outlook on the margins front.
HCLTech increased its year-on-year revenue guidance for fiscal year 2025 to 3.5-5% in constant currency terms from 3-5%, and maintained their operating margin between 18-19%. Meanwhile, Infosys revised its growth guidance for fiscal 2025 to 3.75-4.5% in constant currency terms, up from 3-4% guided earlier. However, the company retained its operating margin guidance for fiscal 2025 at 20-22%.
Large Deals Remain Subdued
On the other hand, large deal momentum continues to be subdued. All the top four Indian IT services companies—TCS, Infosys, Wipro, and HCLTech—recorded year-on-year decreases in their total contract values (TCV) during the quarter ended September, due to continued lumpiness in large deal wins and the absence of new mega deals.
According to Infosys, the focus of large deals is still heavily skewed towards cost and efficiency. Mphasis’ CEO mentioned that mega deals, especially those involving cost transformation, have decreased significantly since 2023.
Jain also added that mega deals, particularly in the digital transformation space, are on hold due to uncertainty around AI technologies.
The decline in mega deals reflects the cautious approach companies are taking, especially in sectors like BFSI, which have been affected by the uncertain global economic environment. TCS’s CEO highlighted that financial institutions, especially in the US, are prioritising cost efficiency and vendor consolidation, rather than investing in large-scale transformations. “Demand for discretionary deals remains relatively subdued,” he said.
From: financialexpress
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