All entries for Monday 19 September 2005

September 19, 2005

Outsourcing– Mega Size

India Cause, 18.09.2005

The Indian business process outsourcing (BPO) sector is booming. Yes, we’ve heard that story before. Earlier this year when The Economist ran a special report on outsourcing, it hinted that Indian information technology and IT-services companies were gradually moving up the value chain into application development. On 1st September, a landmark deal signed between the Dutch bank ABN Amro and three of India’s leading IT/ITes companies- Tata Consultancy Services (TCS), Infosys and Patni Computers- announced with a bang that this was really what was happening.

The deal is estimated to be worth around €1.8 billion ($2.24 billion), and will cut ABN Amro’s headcount in the IT department from 5,000 to 1,800 with 2,000 of those jobs headed India’s way. The estimated savings for the bank will be around €258 million a year. Apart from the three Indian companies, Accenture and IBM are also part of this deal. While the former will focus on delivering applications in co-ordination with the Indian companies in certain parts of the operations of the bank, IBM will provide the IT infrastructure, i.e., servers, storage and desktops.

T.V. Mohandas, Chief Financial Officer at Infosys, says that initially work will be largely onsite, with 5–6 months being required to gradually begin the offshoring. Beginning on 1st September, it would take around 18 months to implement the arrangements that have been agreed upon.

Predictably, the heads of the Indian companies are upbeat about the prospects of this deal. Nandan Nilekani, Chief Executive Officer of Infosys, remarked that “[t]his is a landmark deal [for the company].” Worth around $200 million, the company will be in charge of developing and delivering applications for the bank’s Asia Pacific operations from its bases in Taiwan and Hong Kong.

For TCS, India’s largest IT company, this is simply a nice ending to a happy European summer which has seen its business go up by 60% in the last year in the region. Leveraging its Global Delivery Model based in Latin America and Hungary, the company will manage application support and enhancement services for ABN Amro’s operations in Netherlands and Brazil, besides catering to its private clients globally. It will also deliver the Strategic Pan King Platform for the bank.

All this is pleasant, yet hardly a surprise for S. Ramdurai, CEO of TCS, who says- “TCS has been investing continuously to build its Global Delivery Model and best-in-class execution abilities. The milestone engagement with ABN Amro is a complete and irrevocable validation of [our] global delivery strategy.” The share markets seemed to agree, as the Bombay Stock Exchange saw sharp rises in the stocks of all the three Indian companies involved in the deal.

A question on profitability of this deal for TCS has been raised. While bagging large contracts, companies with a cost advantage generally push themselves to the extent of losing their current profitability margins. The deal is supposed to pocket $200 million over 5 years for TCS. However, company bosses maintained that while prices had been competitive, profit margins would remain unhampered.

There are also speculations raised on in-fighting between the Indian companies over this deal. NDTV, a popular television channel in India, reported on September 1st that Infosys had initially hoped to bag the “Indian part of the deal” all for itself and it had strong confidence in its business model. In the end, while it turned out to be the single largest deal ever bagged by the company, it had to share the glory with two of its competitors. Lars Gustavsson, CIO at ABN Amro, explains why- “There is simply no single vendor who can satisfy all the needs of the bank”. However, industry pundits should be encouraged by the fact that not one, but three of India’s companies were “good enough” for the Dutch bank to take on board.

All this isn’t out of the blue moon. Indian BPO and software companies have been posting sales growth rates in excess of 30% for a few years running now. Perhaps the most encouraging point here is that Europe seems to have finally jumped on the outsourcing bandwagon. ABN Amro joins the list of eminent banks already associated with Indian IT/ITes companies- BNP Paribas, Sociele Generale, ING, etc. It also provides exciting opportunities for Indian firms to explore new avenues to hitherto unexplored markets of Latin America and continental Europe, even as they already look towards East Asia (Japan in particular). The global sprawling of India’s IT companies has, it seems, finally begun.

What purpose this deal serves the most is the big names involved in it. This will give invaluable positive and stature-raising publicity for the Indian companies. Consistent performance has always been there- but headlines are what they need now. Dheeraj Sachdev, portfolio manager at ASK Raymond James says- “[The IT industry] needs a few more such wins”. Indeed, it could be seen as an important step forward.

September 2005

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