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IT companies face demands for discounts, payment delays from clients

This means, the software services firms will have to effectively take a hit on margins to protect long-term customer relationships. IT companies, which are already facing the prospect of billings reducing sharply as clients stop non-essential work, will now have to begin managing their cash flows.

Last Updated: Apr 09, 2020, 04.50 PM IST
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“We are seeing 60% of our clients requesting discounts. This can range anywhere from 20-50% with 30% being the average,” Steve Hall, Partner and President at ISG, said in a presentation on the state of the outsourcing market.
Bengaluru | Mumbai: Dealing with issues around cash flows, clients are seeking large discounts and payment delays from IT services providers in the wake of the Covid-19 pandemic.

This means, the software services firms will have to effectively take a hit on margins to protect long-term customer relationships.

IT companies, which are already facing the prospect of billings reducing sharply as clients stop non-essential work, will now have to begin managing their cash flows, industry executives said.

The discounts and pay delays sought by clients are large, according to firms that help clients negotiate and manage contracts.

“We are seeing 60% of our clients requesting discounts. This can range anywhere from 20-50% with 30% being the average,” Steve Hall, Partner and President at ISG, said in a presentation on the state of the outsourcing market.

Hall added that clients also wanted relaxation in payment due dates to 120 days from 30-45 days previously.

“Clients want these for short durations, 60-90 days so far, but we are seeing some clients ask for discounts and relaxations going up to a year,” Hall said.

ISG has 700 clients, including 75 of the top 100 customers in its markets, according to its annual filing with the US Securities and Exchange Commission.

Pravin Rao, the newly appointed chairman of industry lobby group National Association of Software and Services Companies (Nasscom), said that Indian IT firms have seen clients impacted due to the crisis asking for deferred payments.

“Short-term there will definitely be an impact. Companies in travel, hospitality, retail are particularly struggling,” Rao, who is the chief operating officer of Infosys, told ET. “There are cash flow issues, so we do expect to see some demand for delayed payments”.

For IT companies, some discount requests are coming due to a shift to the work-from-home model.

“Clients want to preserve their cash, so they need discounts. One of the first things they are asking for is productivity discounts, because people are not as productive in the work-from-home model because of infrastructure and process issues,” a senior executive at a top-five IT services company told ET.

Another executive said companies were open to giving these cuts because ‘there was no other option.’

“The entire travel sector has a cash flow issues. Airline consultants are talking about possible bankruptcy. There isn’t a choice. But by being flexible we can hope to get bigger partnerships when things go back to normal,” he said.

A few US-based research firms are already cutting target prices of IT companies.

James Friedman, analyst at Susquehanna Financial Group, cut target prices on shares of Infosys and Cognizant citing checks that suggested "client budget cuts have started."

The impact of discounts provided by mid-cap IT companies to their clients will also be keenly watched by analysts to determine the extent of slowdown in revenue growth in the coming quarters.

According to a note by HDFC Securities, for Hexaware, impact from pricing discounts, payment terms extension and project delay/cancellation, was a key concern.

Similarly, for Persistent Systems, “payment terms changes from key accounts; risk of financial stability of customer portfolio,” were cited among critical components to watch out for in the coming quarter.
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