The Hindu Business Line : Choosing the best

Global IT outsourcers are awarding deals to multi-vendor teams - and picking the best options in these spaces too. Which means more business coming our way.

Doing IT smarter and getting choosier in the bargain too!

Global IT outsourcers are increasingly favouring awarding a deal to a multi-vendor team.

And within that structure, they are looking to hand over the different components to the `best of breed' players in that space — in this context, specialised service providers who can address specific client needs.

As a result, large, chunky deals that used to go to biggies such as IBM and Accenture are now trickling down to companies like TCS, Infosys and Patni.

Two recent multi-vendor deals — Kimberly Clark and ABN Amro — involving global and Indian companies illustrate that multi-vendor and this kind of `best-of-breed' IT outsourcing has begun with a bang.

The first part of the ABN Amro deal, worth about $1.8 billion, went to EDS. The second part, of almost a similar size, went to IBM, TCS, Infosys, Accenture and Patni. In this deal, although IBM got the bulk of the opportunity, TCS and Infosys got a reasonable size of the pie with Accenture and Patni getting hunting licence. The entire `application outsourcing' was distributed to five companies — IBM, Accenture, TCS, Infosys and Patni. The US-based Kimberly Clark, a health and hygiene company, saw a different type of outsourcing where the areas of specialisation came into fore. Cognizant won the Applications part of the deal, Genpact won the Finance and Accounting part of BPO (business process outsourcing), TCS the Infrastructure Services and Accenture the HR outsourcing slice.

Marking strong growth

According to TPI, a sourcing advisory firm, the outsourcing market in the Asia-Pacific grew strongly in 2006 - globally the year concluded with a total contract value (TCV) of $78 billion. In its first, semi-annual `TPI Index' for the region, TPI reported that the number of deals signed in the Asia-Pacific, valued at more than $25 million, increased by 43 per cent. The total value of these contracts has increased 67 per cent, representing a five-year high in outsourcing activity, says information available at the TPI Web site.

At the same time, competition in the region has been heightened. The Big Six of outsourcing (Accenture, ACS, CSC, EDS, HP, IBM) are winning a decreasing proportion of those deals valued at over $25 million. This group won 40 per cent of Asia-Pacific total contract value, compared with a 60 per cent share in 2002. "The increasing level of competition confirms that clients in the Asia-Pacific are following the global trend and are becoming more receptive to doing business with non-Big-Six Providers.

Alongside the global giants of outsourcing, there is clearly room for smaller, specialised service providers who can address specific client needs. As the market matures, we should see this level of competition increase significantly. At the moment, success for service providers in Australia, India and Japan seems to be the determining factor for success in the Asia-Pacific," says Arno Franz, Managing Partner of TPI Asia-Pacific.

GM - among the trendsetters

General Motors was one of the first companies that moved to this approach. In February 2006, the automaker opted to spread its $15-billion budget across a number of providers — EDS, HP, IBM, CapGemini, Covisint and Wipro — to reduce its own risk exposure, encourage a healthy rivalry among vendors, and take advantage of offshore pure plays for discrete activities. At the same time, GM also slashed the contract term from ten to five years, says a report by Booz Allen Hamilton, a global consulting firm.

"By engaging in multi-sourcing, GM gets the best of both worlds: world-class, value added, strategic IT support, as well as access to low cost and efficient non-core service provision," the report says.

Increasingly, companies are adopting this approach to global sourcing and engaging multiple vendors who specialise in select processes or services. Not only do companies enjoy benefits across functions, but multi-sourcing also reduces outsourcing risk. Businesses can hedge their bets by retaining a number of smaller expert suppliers, rather than a single large provider. They can more easily address failures in specific areas (by replacing that particular vendor) and multi-sourcing enables more competitive pricing — both before selection and once service commences, the report, available at its Web site, says.

Customer's call

R. Chandrasekaran, President and Managing Director, Cognizant, echoes a similar view. Earlier customers looked at size and outsourced end-to-end requirements to large global system integrators.

However, today they are looking at `best-of-breed' partners in each of the areas — say in management consulting, IT architecture, application outsourcing, infrastructure outsourcing and BPO. "This trend is clearly providing greater opportunities to offshore providers across segments of specialisation.

"Demand for offshore services is strong and it will benefit the entire IT industry. One of the reasons for a broad-based growth opportunity is because the customers' reliance on a single vendor to provide end-to-end services is diminishing.

They are unbundling their requirements and partnering with multiple players in specific areas of their strengths."

Daryl C. Plummer, Chief Gartner Fellow, in his top trends in 2007, has predicted that through 2009, market share for the top ten IT outsourcers will decline to 40 per cent, equalling a revenue shift of $5.4 billion.

In a podcast — a media file that is distributed over the Internet — the Gartner analyst has said "We actually believe that the top ten IT outsourcers will see a lot of their revenue migrate towards smaller groups and people will be much more be selective in their outsourcing. We are going to see a major shift there."

IT'S ALL ABOUT BUSINESS

William Bruce Grahame Padfield, CEO, Datacraft Asia Ltd, a $480-million Singapore-based information technology service and solutions company, recently told eWorld that the trend of awarding big outsourcing projects to a single vendor is coming to an end. Companies are looking for a multi-vendor strategy to make business better. "It is about the change in business outcome that is important," he said.

In 2006, Datacraft was involved in five major multi-vendor outsourcing deals, and the number is set to double in 2007.

According to Steve Rohleder, Chief Operating Officer, Accenture, "more companies are going to take the multi-vendor strategy, which is very focussed. In some of the mega deals, Accenture became the single point of contract for the client, supported by smaller companies.

This trend is likely to continue for the next few years." Companies have started focusing on `outcomes' and global sourcing is a growing trend. Competition will get tough and only vendors with the capacity of gain and pain sharing will survive, he says.

raja@thehindu.co.in