An IT services company with USD 500 million of revenue wins a USD 300 million five-year deal that ramps over 12 months at a margin 6 points below its average. What does it do to growth and margin next year?

Growth jumps from 8% to about 15.2% next year, and the EBIT margin slips about 37 basis points to 19.63%. The deal runs at about USD 66 million a year once ramped, but year one collects only USD 35.8 million. In year two the full run rate arrives, growth is 12.8% and the margin dilution deepens to 19.39%. A large deal lifts growth first and costs margin for longer.

Start by converting the contract value into a run rate, because the ramp changes it. Total contract value divided by five understates the run rate: the first year delivers only 6.5 months of full revenue, so the remaining months must carry more. Solve for the monthly run rate: 6.5 months in year one plus 48 full months equals USD 300 million, so a full month is USD 5.50 million and a full year is USD 66.1 million. The total contract valueThe revenue a client commits to across the whole life of a contract, before any ramp, renewal or cancellation. is the size of the prize; the run rate is what shows up in a year.

The base business grows 8% to USD 540 million at 20%. Add the deal's USD 35.8 million at 14% and revenue reaches USD 575.8 million, growth of 15.2%. Large deals lift growth and dilute margin in the first year, but the dilution is small at first because the deal is still a small slice of revenue. The blended margin is 19.63%, down about 37 basis points. It is like a restaurant taking a big catering order at a thin price: the till rings louder at once, and the average margin falls in proportion to how big the order is against normal trade.

Transition costs. Moving work from another vendor means paying for two teams while knowledge transfers, and many deals earn far less than their steady margin in year one. If the deal earned 5% in its first year instead of 14%, the year-one margin would be 19.07%, a cut of 93 basis points rather than 37. Ask management three things: the year-one margin on the deal, whether the contract has a termination clause after year two, and how much of the value depends on volumes the client can cut.

Then give the view. The deal is good for growth and adds to EBIT in absolute terms, since it earns a profit even at a lower margin. The market usually forgives margin dilution that comes with visible growth, as long as management said so in advance; it punishes dilution that arrives as a surprise.