The contract size of digital products have increased significantly in 2017, reinforcing vendor commentary that digital services are in the implementation mode, said a survey conducted by UBS Evidence Lab across 224 IT decision makers in Fortune 500 and Global 1000 companies.

The improvement in offshore rankings has come more at the expense of in-house capabilities and specialist vendors than the large consulting-led service providers, said the study.

This is contrary to current investor perceptions, noted the study. “Preference for Western-heritage vendors continues to increase. The lower reliance on in-house skills (two-thirds of respondents cited flat or lower budgets) is consistent with the move to implementation for digital services,” it said.

The study found that it is unlikely that the adoption of digital services lead to further offshore revenue deceleration. Digital services adoption is now in the implementation mode and beginning to generate larger contract sizes. While these contracts are still smaller than legacy services, digital is growing at a 30 per cent year-on-year revenue pace. As digital exposure continues to increase, it should offset the lag from legacy services, the survey said.

Diviya Nagarajan, analyst at UBS Securities India, said, “We expect revenue momentum for large outsourcers to stay at current levels in the next 12 months, barring any demand slowdown in large IT user segments.’’

Not all legacy vendors will benefit from the move to digital. Vendors that aggressively self-cannibalise and acquire new capabilities will garner a disproportionately larger market share. Consulting-led companies continue to dominate client mind share due to early investments. Some large outsourcing-led service providers, including offshore vendors, are now beginning to catch up in terms of mind share and market positioning. This is a result of the global IT services market moving into the implementation mode in 2017 from the heavy consulting tilt in 2015/16, found the survey.

As per UBS Evidence Lab observations, data from industry and third-party advisors reinforce the view that legacy services revenue is now increasingly being disrupted by digital technologies. “We believe the broader markets have priced in such a disruption, with many services stocks either flat or declining year-to-date. Offshore service providers have de-rated sharply as the market expects them to lose market share in the digital era,’’ said Nagarajan.

“We think the tide against offshore is showing signs of receding,’’ noted Nagarajan.

UBS Evidence Lab survey findings show a steady increase in digital ranking and client mindshare for offshore providers in 2016 and 2017, compared with 2015, reinforcing our view that offshore revenue is close to the bottom. In the past two to three years, consulting-led companies gained market share on a consulting boom in digital services, while offshore revenue slowed. This has given way to broad-based implementation in 2017. Offshore vendors have ramped up capabilities, which should allow them to gain share.

“From a technology shift perspective, we think the worst is over for offshore providers, contrary to market perceptions. However, revenue upside in the next 12 months is likely to depend on improving demand in sectors such as banking and retail, and internal issues at some companies,’’ concluded the study.