The Hindu Business Line : Icing takes the cake

Tech players are getting more than what they bid for in deals — call it compromise or value-addition. Looks like the ‘era’ of ‘vanilla responses’ from clients is over.

“The philosophy in large deals is to choose a life partner rather than a vendor and the bid must reflect that spirit and maturity.”

K.V. Srinivasan

Adding that extra dollop.

Archana Venkat

Plain vanilla cone or chocolate sundae? Depends on how hungry one is. Information technology (IT) companies in the last year have been developing an appetite for deals that do not resemble the plain vanilla ones they used to bid for in the past.

Cognizant bagged a seven-year-deal with Rabo Bank through Netherlands-based local vendor Ordina. Ordina is believed to have had to pay Rabo Bank $21 million to sub-contract the deal to Cognizant. While bagging the Kimberly-Clark deal, Cognizant also signed up to co-manage Kimberley-Clark’s one-year old ‘captive’ operation in Buenos Aires with plans to expand operations there.

Tech Mahindra won a $1-billion deal from British Telecom encompassing more than the regular software development and maintenance work. Wipro bagged the two-year Credit Suisse deal after committing to a ‘quasi’ build-operate-transfer (BOT) structure, where the former would run a captive operation for Credit Suisse in its Pune facility.

Infosys Technologies structured its seven-year $250 million deal with Royal Philips Electronics (Philips) as an acquisition and paid about $28 million upfront to take on board 1,400 employees of Philips across Poland, Thailand and India. Further, Infosys BPO will provide finance and accounting services and processing of purchase orders to Philips.

Some refer to these as compromise deals (as vendors end up receiving more than what they bid for), others call them value-added deals or simply large deals. Though the finer aspects of each deal structure may differ, it is interesting to note that transfer of client assets is common to them all.

Is this the way forward for future deals in the Indian IT space?

Life partner rather than vendor

“The era of submitting a ‘vanilla response’ is now obsolete,” says Sanjeev Nikore, Corporate Vice-President and Global Head (Sales & Marketing), HCL Technologies. “All clients look for innovative price models, which may mean co-investment or sharing risk and rewards,” he says.

Cost savings is just one of the parameters while evaluating large deals. Management of risks (say, through manpower transfer), value-added services and the ability of the partner to continuously innovate and visualise the client’s changing business are more important than a pure price play, he says.

HCL has bagged large deals in the past with clients such as Teradyne in the US (a $70-million multi service outsourcing deal where HCL took over the entire IT operations and all IT employees), UK-based DSG Group (a five-year $333 million total outsourcing deal involving acquisition of 350 DSG employees) and Skandia Group (a $250 million five-year deal that involved acquiring 250 Skandia employees.

“The philosophy in large deals is to choose a life partner rather than a vendor and the bid must reflect that spirit and maturity,” says Nikore.

Building compelling value

Such deals are in line with traditional outsourcing deals in mature markets such as the US and Europe, says Gaurav Gupta, Country Head, India, Everest Group, a research and consulting firm. “Indian companies have so far done project-based work and not developed end-to-end capability. Now they are trying to build a compelling value proposition by offering offshore, on shore and near shore options. To do this, they will need to forge alliances with local companies or centres set up by the client,” he says.

When Satyam Computers, along with Fujitsu Services, bagged Reuters’ 10-year $1 billion IT transformational deal in October, it saw this as an opportunity to maintain and improve margins.

The deal is fundamentally fixed price with project work potentially occurring as time and material or share of gains. Satyam will extend its support and development across core applications and provide managed infrastructure services for desk side support, a global network operations centre and remote infrastructure management. Some of these services will be delivered via Fujitsu. Transfer of assets (people and others) will be shared between Satyam and Fujitsu.

Five years ago such a deal would not have been possible, says Hetzel Folden, Senior Vice-President, Strategic Deals Group, Satyam Computer Services. Fujitsu and Satyam were then emerging outsourcing service delivery providers without sufficient scale or experience to bag a deal of the Reuters size.

In 2002, Satyam’s revenues were a little over $400 million and it had 8,600 employees; in 2008 it is expected to be a $2-billion company with over 50,000 employees. Further, Satyam’s role in such a deal five years ago would have been limited to staff augmentation, strictly from a cost arbitrage perspective, he elaborates.

Many sides to gains

Shyamanuja Das, Executive Editor, Dataquest, CyberMedia, a specialty media house with market research capabilities, says Indian companies gain multiple things through such deals — an assured annualised revenue, increased scope for value addition and readymade onshore/near shore delivery centres that can service other clients. Vendors can provide value addition by using better processes, technologies and best practices to improve a client’s in-house set-up. To deliver this efficiency, vendors may either charge a premium or share gains with the client, Das elaborates.

Call for caution

Advantages aside, companies need to be cautious about the issues that confront these layered deals during implementation.

Sudin Apte, Senior Analyst, Forrester Research, says most deals of this nature need renegotiation two-three years into service, depending on their structure. “Often the original deal size is not met and deals end up at lower value”, he says. In cases where deals are routed through a tier-I or tier-II company or involve multiple vendor partnerships, it becomes difficult to estimate the size of the deal. Also, terms and conditions and clear role definition for vendors is, at times, unclear.

Costing is another important aspect. Thyagesh Baba, Director of investment management firm Spark Capital, says if costing of the deal does not factor in the advent of cheaper technology, equipment maintenance and sub-contracting to third parties and employee wage hikes, it could adversely impact margins. “I would recommend these deals only if they show signs of visibility (for the company’s brand name), predictability (of revenues) and consistency (of getting similar deals),” he says.

Indian companies will also have to invest heavily in employee integration related issues, feels Everest Group’s Gupta. “They have the additional burden of cross-culture differences, besides the usual cross-company difference”.

Growing into ‘super-vendors’

While research companies are evaluating the effectiveness of such deals over plain vanilla ones, one thing is clear — these deals are here to stay.

“As Indian companies get into more of mainstream outsourcing, they will have to participate in/be exposed to non-standard deals of this nature,” says Partha Iyengar, Regional Research Director, Gartner. Forrester’s Apte says it might not be long before large IT companies in India act as super-vendors and may route deals for smaller companies.

Agrees Salil Godika, Chief Strategy Officer, MindTree Consulting, who says such deals are no longer restricted to the IT majors but trickling down to mid-size companies too. “Some mid-size companies have entered into a BOT kind of arrangement with customers,” he says.

archana@thehindu.co.in

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