Industry experts said the top players like Tata Consultancy Services (TCS), HCLTech, Infosys, and Wipro will be better positioned to tap this opportunity, as quite a few such deals fall under traditional outsourcing requirements.
“Yes, cost-takeout is back with a vengeance, and we can see the pipeline for these deals filling up fast. The beneficiaries of this demand will be widespread as most firms are well positioned to take advantage of this,” said Peter Bendor-Samuel, chief executive of IT research firm Everest Group. “We also see a lot of interest in cost saving for the legacy workloads which will accelerate the traditional outsourcing markets.”
The focus on cost is because the business environment globally is facing challenges such as high inflation, economic slowdown and geopolitical tensions in specific pockets like Europe.
The after-effects of this have been seen in layoffs at Big Tech firms such as Meta, Microsoft and Google.
TCS said during its third quarter results that demand for strategic, long-term, cost-based restructuring deals in markets like the UK is on the rise, whereas both cost optimisation and transformation deals are being seen in the United States.
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Transformation deals are generally spread over a longer tenure and involve changing the core processes of an organisation.“For now, we see client caution translating into greater focus on cost optimisation. We are seeing an increase in the number of large operating model transformation engagements,” said TCS chief executive Rajesh Gopinathan during the third quarter analyst call.
Infosys CEO Salil Parekh told analysts that the company has, across sub-verticals, seen increased client spend on digital transformation, including digital supply chain, omni-channel commerce and large-scale cost takeout initiatives to improve business resilience.
Wipro chief executive Thierry Delaporte also said there was an increasing trend of cost optimisation deals during the quarter, including a large deal with a US-based financial ratings agency. “We have a growing number of opportunities to help our clients reduce the cost of running the operations…as companies tend to be more focused on what is real in terms of payback,” he told ET.
During the October-December quarterly review of IT services performance by ISG, Steven Hall, the research firm’s president, noted that cost optimisation initiatives were driven towards investing in new areas.
“So, if we look at the IT sector, you are likely to see growth in managed services, and a little pullback on spending in some other areas, but it is really just optimising their costs,” he said.
Across engineering, industry specific BPOs and IT services, the demand for such solutions remains strong, he added.
ISG said enterprises, even while looking for cost optimisation deals, were not necessarily choosing the lowest bidder but the most value-driven offerings that will also drive digital transformation goals.
HCLTech has not reported a large share of cost takeout deals so far but expects to see more of them in the upcoming quarters, it said.
“I see them (cost takeout deals) coming into the pipeline in this quarter and next quarter, and they will really result in some kind of bookings in Q2, Q3 of next year,” said its chief executive C Vijayakumar.
Midcap IT services providers and business process outsourcing organisations are seeing a similar trend.
“Based on my gut feel, 70% revenue acceleration and 30% cost optimisation one year back… the equation has flipped to 30:70 now or even 25:75 with cost-based deals taking the lead. It is the flavour of the next few quarters to come,” Sandeep Karla, CEO and ED of Persistent Systems told ET.
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