11,201.75-431.55
Stock Analysis, IPO, Mutual Funds, Bonds & More

IT rejigs its bills as deals dry up

Financial engineering has been an industry practice for long, but its nature is now changing.

Last Updated: Jan 23, 2020, 03.30 PM IST
0Comments
it-bccl
Financial engineering has been an industry practice among tech services providers for long, although it is changing now, said Siddharth Pai, an IT outsourcing consultant.
BENGALURU: As IT services companies compete to win in a market where demand is dwindling and there is increased pressure to retain clients, large deals are witnessing a financial engineering component.

These could range from one-time discounts or deferred payment plans to upfront cheques for expected savings. The financial aspects of deals are particularly important in the legacy area, which still accounts for a significant chunk of IT services revenue despite the rise of newer technologies.

“In services which are getting more and more commoditised and price-led, the focus is first, how do you extract more efficiency, and once the efficiency (has) reached a logical limit, you tend to go to this kind of financial engineering,” said Rajesh Gopinathan, CEO of Tata Consultancy Services, India’s top IT services provider.

Since the areas in which financial engineering are required is shrinking, the volume of deals that require such terms will decline as more digital deals replace them, he said.

“There is no hardand-fast rule; if the customer situation is important, we take a tactical call... But if the deal is right, we are quite aggressive,”Gopinathan said.

“Strategically, the idea is to minimise exposure to such events by continuously cycling to the new,” he added.

Financial engineering has been an industry practice among tech services providers for long, although it is changing now, said Siddharth Pai, an IT outsourcing consultant. “While in the past IT vendors offered to finance the payment owed by clients, today, similar options are offered through guaranteeing savings to the clients upfront,” Pai said.

Tech services companies may either offer an upfront cheque on savings to their clients or opt to decrease billing for long-term deals, he added. However, options such as guaranteed savings to clients puts pressure on service providers to make more profits on top of the savings already promised to the client, he pointed out.

Financial engineering is usually restricted to larger, long-term deals, which can increase the risk a company takes – long-term deals are complicated to execute and execution risk, coupled with financial risk, can be an issue. Wipro said it looks at various financial methods that improve its chances of winning a deal but always well within accounting rules.

Comments
Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links


Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service