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New deal signings in IT services industry expected to pick up further momentum

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ISG, a leading global IT consultant, has pointed at heightened IT services spend across the globe, led by Cloud migration. ISG has improved its annual guidance for CY21 as new deal signing has been strong across the IT vertical in Q1FY22. And it is likely to remain strong for the rest of the year.

Strong Traction in Traditional and Modern Services

Overall annual contract value (ACV) increased 32% YoY in the June ending quarter with both As-a-Service (AAS) and traditional services vertices reporting strong growth.

The annual contract value for traditional IT services grew by 23% YoY in June quarter, due to continued strength in the medium and large deal pipeline. This implies the strongest YoY performance in the last seven years. ISG has revised its guidance from 5% to 9% in this segment due to the strong order inflows.

ACV in As-a-Service (AAS) segment grew at 38% YoY in the June ending the quarter, with strong performance coming from Infrastructure-as-a-Service (IaaS) segment. On the other hand, growth in Software-as-a-Service (SaaS) platforms remains slow. ISG has improved its growth guidance from 18% to 21% for the calendar year 2021.

Large Deals Offsets Increasing Cost

There has been an increased demand for the relevant skills as order books have swelled in the recent past. Competition to win and retain talents has intensified as order books have swelled and attrition rates have increased. Companies are also hiring college graduates at scale, which should reduce the dependence on subcontractors.

With the contribution of these factors, IT providers are seeing a sharp rise in their employee costs. As a result, companies are likely to take a hit on their margins, but its impact on profitability is largely nullified by the strong order wins.

Closing Comments

ISG’s strong commentary on both AAS and Managed Services is encouraging for the Indian IT Services industry. The industry is expected to deliver strong double-digit growth in CY21 backed by the flow of new deal wins and its timely execution.

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