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Brexit may not cut IT outsourcing, but large deals will be fewer

Debasis Mohapatra/Bengaluru 16 Mar 19 | 11:05 PM

The total value of outsourcing contracts from Britain in information technology (IT) is likely to see a marginal rise, albeit on a lower base.

This is despite the uncertainty on that country’s pending exit (Brexit) from the European Union. However, the nature of these deals are already seeing a big change. Bigger contracts are being split into parts and outsourced into multiple vendors.

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According to global IT research and advisory entity ISG, the British outsourcing market shrank 27 per cent to €2.5 billion ($2.9 bn) in 2018, weighed down by the Brexit decision.  

Analysts feel all big IT service firms would see growth headwinds from their UK business. This is despite a rise in total contract value, as multi-billion digital transformation deals might not be up for bids an more.

"Clients are taking outsourcing decisions but are delaying decisions related to strategic projects. Smaller deal sizes are indicative," said Pareekh Jain of Jain Consulting. "As Indian IT is betting big on long-term transformation projects, with more digital components, to drive revenue and profitability, most big Indian firms will be impacted negatively in the short run, as clients hold back their discretionary spend."

ISG says the trend is more towards a fragmented market, with a five per cent increase in the number of individual contracts in the UK this year. Since the Brexit vote in June 2016, Britain's traditional outsourcing market has slumped. Prior to the vote, the average outsourcing contract per quarter was close to $900 million. That level has not been touched since then.

At present, the risk of the UK's disorderly exit from the European Union (EU) is quite high, with the March 29 deadline approaching. Despite several attempts, there is still no agreement on the matter. Analysts feel the country is slowly moving towards a ‘hard’ Brexit. Resulting in unfavourable trade terms with the EU, impacting business competitiveness to a large extent.

"Brexit is causing a lot of concern in the marketplace, since it does not look like  the UK is going to be able to negotiate favourable terms with the EU for the exit," said Hansa Iyengar, senior analyst at London-based Ovum Research.

Among Indian IT players, the four largest ones — Tata Consultancy Services, Infosys, Wipro and HCL —have a large exposure to the UK market. As the island nation is considered the financial capital of Europe, domestic IT players are engaged with many marquee financial clients in this region.

In the December quarter, TCS, the only company which reports revenue from the UK, reported 25 per cent growth (year-on-year)) in revenue. That was 15.5 per cent of its total income during this period.

However, despite this sound growth at TCS, market experts say the growth headwinds have not subsided and companies with larger exposure would certainly have to wait for more time before clinching larger transformational deals in this region.

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