The Hindu Business Line : Reading the game

THE decibel levels of a head-to-head clash between multinational vendors and Indian IT service providers for large IT outsourcing deals are rising with every passing day.

Undoubtedly, the $400-million five-year unbundled deal bagged by Tata Consultancy Services and Infosys Technologies from the Dutch financial powerhouse ABN Amro, has played no small role in strengthening this perception in the minds of industry observers.

With the offshoring strategy gaining mainstream status, the vision of a David vs Goliath battle (Read: Indian vs MNC vendor) is slowly being substituted with a slugfest among equals in every large deal that matters.

But is this perception rooted in reality? Yes and No. To some extent, the ABN Amro deal has opened up the floodgates for best-of-breed multiple vendor approach. This is likely to play to the strength of the Indian vendors, especially in deals involving a sizeable chunk of application development/maintenance offerings.

Second, with average deal sizes coming down over the past couple of years, the win rates of Indian vendors for deals in the $50-100 million bracket is bound to increase in the near term.

However, some key changes in the global IT services landscape are lurking on the horizon. Each one of these, if they materialise, can potentially alter the course of this multi-year services battle between the MNC and Indian vendors:

Competitive realignments

Among the Big six multinational vendors - IBM Global Services, EDS, CSC, ACS, Accenture and HP — two vendors are rumoured to be in sell-out talks. HP is said to have teamed up with a consortium of private equity firms (such as the Blackstone group) to buy out CSC (Computer Sciences Corporation). If this deal is consummated, it will create a combined entity with service revenues of $30 billion, second only to IBM Global Services.

Through this combination, if these two companies can protect and complement their long-term contract commitments, especially $500 million-1 billion engagements, they will be in a position to improve margins in the medium term.

In turn, by widening their offshore presence and stabilising cash flows, they will be able to compete effectively with the low-cost Indian vendors over time.

Similarly, a consortium of private equity firms such as Texas Pacific Group, Blackstone group and Silver Lake Partners is negotiating a buy-out of ACS (Affiliated Computer Services). Clocking revenues of $4.5 billion, ACS is a big player in smaller-sized deals (in IT and BPO) relative to IBM, EDS or CSC. This, along with its wide global geographic footprint, puts it in a good position to reorient its strategy to capitalise on the robust growth expected in BPO contracts. If these private equity deals go through, their potential success will be watched closely. Their entry into the services arena opens up a new "big bang" acquisition strategy for consolidation among multinational and Indian vendors (both frontline and mid-sized).

Contract restructurings

Slowly but surely, Fortune 500/Global 1000 clients are moving away from a single vendor relationship to multiple vendors. But the unbundling opportunity (where distinct elements of a contract such as data centre, infrastructure management or application management are broken up and offered to different vendors) is more likely only for new contracts and less for existing ones.

Both the key outsourcing advisory firms, TPI and Everest Group, concur on this view. According to TPI Index presentation in early January, in mega contract restructurings dictated by changes in scope, volume or business needs, the incumbent service providers were retained in 90 per cent of the agreements signed in 2005. Among the Big Six, CSC witnessed the largest number of high profile IT outsourcing contract extensions among the Big Six this year. But it managed to weather this phase rather well.

In the last quarter alone, it managed to sign contract extensions with the likes of Dupont, Ford, General Dynamics and MBDA (world's leading missile systems company). Other large players are also likely to face less of a problem on this count.

However, the problem area will continue to be the smaller-sized new deals ($50-200 million), where the Big Six players have been consistently sacrificing market share. While the likes of IBM and Accenture have addressed this problem by stepping up their workforce in India, EDS has entered into a strategic alliance with Nasdaq-listed Cognizant for application management services. This year will be the litmus test of this strategy for the Big Six vendors.

Mid-sized growth pangs

If the above two trends play out in favour of the Big Six multinationals, it is likely to put greater pressure on the European firms such as Cap Gemini or Atos Origin and select mid-sized US vendors such as Keane or Perot to scale up through acquisitions. Recently, the senior management of Cap Gemini and Atos Origin indicated that they were exploring acquisitions of mid-sized companies in India. This is hardly surprising since these players significantly lag their bigger peers such as IBM or Accenture in offshore employee count. And it appears that acquisitions can help them leap frog their offshore presence quickly and improve their thin operating margins.

maverick@thehindu.co.in