Contracts to outsourcing: How Covid-19 may disrupt India's IT sector

Cornavirus pandemic likely to push the sector to bring in changes to operating and delivery models.

The Covid-19 pandemic may well become a ‘black swan’ moment for the IT outsourcing services industry, ringing in fundamental changes ranging from the delivery model and contract specifications to the accelerated adoption of specific technologies.
 

The crisis is prompting stakeholders to tweak their established practices in multiple ways. According to industry watchers, while the existing delivery model is likely to have a higher remote working component in future, clients are also expected to renegotiate on deal pricing, asking for more ‘outcome-based’ pricing models than fixed price models.
 

“The major change will be in the nature of outsourcing deals which will shift more rapidly towards digital (services),” said Hansa Iyengar, principal analyst for Digital Enterprise Services at global consultancy firm Omdia.
 

“There will also be a shift towards more risk and reward sharing in the contractual terms where customers will expect vendors to put their money where their mouth is,” he added.
 

Currently, most big IT services firms draw around 50 per cent of their revenues from fixed-price contracts. While the share of fixed price contracts for HCL Technologies and Wipro have been more than 60 per cent, Infosys derives over 50 per cent of its total revenue share from such projects.

 

The pandemic has shown that remote working is possible without any productivity loss, said Krish Shankar, executive vice president and group human resource head at Infosys. “The future of work will be hybrid (a mix of remote working with work from the office). This will expand the talent pool for the industry.”
 

Experts said that once the hybrid model of working from the office and from home is adopted, it will lead to cost savings for IT firms by bringing down their spending on real estate.
 

The adoption of a model with a higher degree of remote working is also expected to alter the offshore-onshore delivery capabilities for IT players. “IT services players are now having a relook at whether they need to maintain staffers in all geographies where they operate when work can be done remotely,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting, adding that offshoring is likely to see a spurt in the post-Covid world.
 

Currently, the offshore-onshore ratio for most IT services firms stands at 80:20 where the bulk of the work is done from offshore locations like India.
 

The Covid-19 outbreak is also expected to bring changes to the business continuity plans of IT services vendors in the outsourcing contracts. Presently, IT companies’ business continuity plans only take into consideration possible regional disruptions. However, a global catastrophe like Covid-19 will force companies to incorporate the minute details of their contingency plans.
 

“In a post-Covid world, IT vendors are expected to introduce clauses which will allow them to operate in work-from-home mode without the consent clauses in case such events recur. Also, more specific force majeure clauses are likely to be part of the contract in future,” said V Balakrishnan, chairman of Exfinity Venture Partners who is also a former CFO and board member at Infosys.
 

In terms of business, the pandemic is expected to push the adoption of more digitalisation in almost all sectors and accelerate migration to the Cloud. According to Peter Bendor-Samuel, founder and CEO of outsourcing advisory firm Everest Group, this is expected to benefit larger companies such as TCS and HCL Technologies more than smaller firms.