Software vendors are having a good time getting more deals every quarter, but with shortening of deal tenure, the total contract value (TCV) seems to be trending downwards. In 2015, the average contract duration was three-and-a-half years. Today, it’s around three years, according to Information Services Group (ISG), a leading US-based global technology research and advisory firm. As a result, the average TCV of a deal has dropped to just under $50 million today as against $66 million in 2015 – recording a 33 per cent decline in five years.
“While contracts are getting shorter, there are more of them. We set a record with 564 awards signed in 3Q21. And we’re on pace to break the previous record for total number of awards in a year – 1,977 in 2018,” the ISG said.
But, can shortening a contract by just a few months have a big impact on TCV? Stanton Jones, Director and Principal Analyst at ISG, said, “Let’s assume a 42-month contract that is worth $35 million in TCV from a few years ago. Today, the average contract length is around 36 months – so the TCV for this deal would now be $30 million. Because of shortening contract durations, the TCV is reduced by $5 million. If you combine this with the hundreds of awards we see each year, it can account for a significant amount of contract value. But it does not mean the market is shrinking – the value is just getting spread around a larger number of smaller deals.”
Favourable for Indian IT firms
Indian software vendors have pivoted to this change better than others. Providers that did not have as much commitment to data centres and hardware were better able to pivot to applications over infrastructure, and automation over labour arbitrage. This trend has been favourable to a number of Indian IT services firms, he told BusinessLine.
Yugal Joshi, Partner at research firm Everest Group said that a shortening time period indicates clients’ unwillingness to get into longer duration engagements with their service providers given the pace of change in technology and their own priorities. For example, if a company is thinking of cloud migration, it will not want to get into a long-term data centre management contract with a service provider as they will not know whether they will have data centres three years from now.
For service providers, though large TCV gives good indication of future revenue, reduction in size and duration combined may not always be bad. This sometimes can improve their annualised contract value, which is a better indicator of current revenue, he said.
