Industry news

TPI, the sourcing data and advisory firm, has released first-quarter market data showing a reduction in outsourcing contract size.

The TPI Index, which measures commercial contracts greater than US$25 million, showed that the 141 contracts signed during the quarter with a total contract value (TCV) of $19 billion, were down 21 percent quarter-on-quarter and 22 percent year-on-year. Annual contract value (ACV) reached nearly US$4 billion in the quarter, down 18 percent quarter-on-quarter and 27 percent year-on-year. The TCV for the first quarter of 2009 was the lowest first quarter since 2001, and the ACV was the lowest first quarter since 2003.

The index also highlighted that the information technology outsourcing (ITO) market delivered a steady flow of contract awards during the past three quarters and the first quarter of 2009 was no exception. ITO transactions, which accounted for 101 contract awards valued at US$15 billion during the quarter, tend to make the most significant near-term cost impact for buyers of outsourcing.

Peter Allen, Partner and Managing Director of TPI, said, “The TPI Index for the first quarter of 2009 delivered a profile of contract awards that reflected the pace set at the end of 2008, and which conformed to the pace experienced prior to the unusual surge of nine to 15 months ago. Looking forward, we anticipate a sustained pace of smaller contracts not unlike that before and after the ‘surge’ of 2008 contracts.”

The first quarter index also provided some telling industry sector and geographical trends. The media, retail, utilities and telecom sectors have all increased their outsourcing activity amidst the current economic downturn.

Tom Lang, Partner & Managing Director of Americas industry verticals at TPI, commented, “With pressure to reduce costs, it is no surprise that some sectors are looking to outsourcing as a strategic driver to help meet those goals.”

The TPI Index also revealed a “tale of two regions” when analysing geographic differences. By number of contracts and TCV, EMEA accounted for the majority of the global market in the first quarter of 2009. The Americas region contributed the greatest ACV in the quarter, at $1.6 billion, demonstrating that the durations of contracts awarded there have tended to be materially shorter than contracts awarded in EMEA.

Peter Allen, summarised, “The pace of outsourcing contract awards has returned to the levels seen prior to the EMEA-driven surge of a year ago, overall, there’s no appreciable upward movement in outsourcing awards. The comparisons tell the story of a relatively soft market for outsourcing compared to this time last year, although some industries are adopting outsourcing at a more rapid pace to better manage the current economic conditions.”

Equifax, the US credit reporting agency, has signed an ITO contact with IBM. The contract covers the provision of IT services in the US, Canada, Spain and the U.K.

As part of the agreement, IBM will provide data centre services including mainframe, mid-range server, client service desk, network and business continuity and resiliency services for Equifax's operations. IBM will utilise its global delivery network of service centres and data centres to support Equifax's employees and customers worldwide.

It is hoped that the new agreement will generate savings and enable the flexibility required for Equifax to support its business. The deal has been put in place to ensure consistent operations and administration across all the countries in which Equifax operates.

"IBM is a key global strategic supplier to Equifax and this new agreement delivers performance accountability, cost productivity, service enhancement and software innovation while deepening the global integration and collaboration between our organizations," said Robert Webb, CIO, Equifax.

Tech Mahindra has finalised plans for its acquisition of a controlling stake in Satyam. In a meeting on Friday company representatives met with the Board of Directors and key executives from Satyam Computer Services to discuss the deal and examine important transition issues.

In a statement from the company it said that the following Tech Mahindra representatives are expected to be nominated to join the Satyam Board. Mr. Vineet Nayyar, Vice-chairman and Managing Director, Mr. C.P. Gurnani, President, International Operations, Mr. Sanjay Kalra, President, Strategic Initiatives; and Mr. Ulhas Yargop, Director, Tech Mahindra and President of the IT Sector, Mahindra Group are all likely to form part of the new management structure.

Mr. Vineet Nayyar, Vice Chairman, Managing Director and CEO of Tech Mahindra, “We have been impressed by the extraordinary skill and dedication of the Satyam leadership, and indeed, of their entire workforce. We have complete confidence in Satyam’s executive leadership to restore the company and take it to new levels of success. We would like to reassure stakeholders that priority focus is being given to retaining critical customer-facing resources, so that the customer experience continues undisturbed”. “This is also a new beginning for Satyam – and for Tech Mahindra. Both companies will now have access to enhanced talent and scale to compete in the global market.”

Under Tech Mahindra’s plans, Satyam will continue to operate as a stand-alone unit and its leadership will continue to drive operations.

It has been widely reported that Mumbai Stock market-listed Tech Mahindra, subject to due diligence, has had its offer accepted to buy a controlling interest in the scandal-hit Indian outsourcer Satyam. News of the bid from Tech Mahindra, which is 31% owned by BT Group, will come as a huge relief to Satyam’s customers.

But the relief felt by Satyam’s current customer base may be short lived. The greater stability the deal brings for Satyam’s future must be balanced against with the very real possibility that the cultural mix between the two organisations may not work – a prediction of several broking firms.

Irrespective of the outcome of the resulting merger, Tech Mahindra cannot be considered the tonic for the rest of the marketplace. When the scale of Chairman Ramalinga Raju’s alleged embezzlement (US$ 1 billion) was announced in January, a huge shockwave ran through the whole offshore market, primarily felt by those using Indian offshore providers. The effects have been twofold. Firstly, with suspicions over the legitimacy of India’s economy added to, companies have begun to review their reliance on India...

Those companies who are offshoring to India are understandably concerned at the prospect of ‘another Satyam’ being discovered, or indeed of other problems surfacing, especially in the light of India’s political upheavals and those of its neighbours, like Pakistan. While there is not a mass exodus from Indian-based outsourcers, geographical risk needs to be reassessed. Proactive risk assessment programmes are being actively pursued, including analysis of levels of dependence on Indian providers, risk mitigation plans and precautionary investigations into providers outside India.

Secondly, the corporate structure of Satyam with a shareholding pattern held overwhelmingly by one family that allowed such a fraud to be perpetrated has been examined, bringing those companies with similar structures under close scrutiny.

These are irreversible effects – so much of an offshoring relationship depends upon trust and this has been ’dented’ if not for the entire Indian IT marketplace, then certainly for the Top Tier providers. Western organisations may now avoid the major players and instead choose perceived ‘safer’ Tier Two Indian IT providers, or look elsewhere towards the emerging destinations previously overshadowed by India’s dominance.

Although Satyam itself may have been rescued, there has been severe short term damage to the reputation of the Indian IT industry. And while there is as yet no evidence of another Satyam-type incident, if a similar situation were to occur, it could be devastating to the rapidly growing Indian economy.

The Australian National Audit Office (ANAO) has extended its 12-year outsourcing relationship with Unisys Australia for an additional five years.

Under the terms of the agreement, Unisys will continue to provide the federal auditing agency with desktop and infrastructure support, LAN and security administration, desktop asset management and change control support. Unisys also takes on the newly defined role of multi-sourcing Services Integrator to strengthen collaboration and effective working relationships between all ANAO internal and external service providers.

“ANAO’s relationship with Unisys spans more than a decade. To date, an outsourced model for IT services has proven successful by enabling us to not only reduce costs but also deliver efficiencies in our provision of audit services to some 300 government bodies. In this latest extension of our relationship with Unisys we have worked together to raise the bar even further, using the ITIL framework to centralise and align our workflow processes and systems to reduce cycle time and improve efficiency,” said Gary Pettigrove, Chief Information Officer, Australian National Audit Office.

“We have also appointed Unisys as the Multisourcing Services Integrator to strengthen collaboration between the internal teams and 17 external service providers. This approach also aims to provide greater transparency and reporting across ANAO’s IT service delivery organisation. This is designed to help achieve better efficiency, effectiveness and coordination of ICT management in line with the recommendations of the Gershon Report,” Mr Pettigrove said.

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The news that the loveable Twitter was infected by a virus this bank holiday weekend has sent me musing into the world of IT. Do not fear, the damage was limited and so we can all continue Twittering to our hearts content. So in the spirit of all that is IT related lets get on with this weeks News Round-Up…

Big blue has got even bigger this week, having received yet another ITO deal. This time it’s a 10-year ITO contract with Kurmanchal Nagar Sahakari Bank Ltd, one of the leading urban co-operative banks in the state of Uttarakhand in India. The big guns at IBM will now remotely host and manage the IT infrastructure and the disaster recovery site, as well as provide the networking infrastructure for the bank.

This agreement is first-of-a-kind for IBM in Uttarakhand and follows its success with other co-operative banks in different parts of the country. It has been a while since I have seen the words ‘success’ and ‘banks’ in the same sentence. Let’s hope things start looking up for more of them soon.

Another ITO contract came in the form of a five million euro deal for Steria, a current bellwether of the outsourcing industry. The contract is with Seguros Lagun Aro, an insurance company belonging to the Spanish Mondragón Group (MCC).

Under the terms of the agreement, Steria, whose operating margin jumped a whopping 24.7 per cent for 2008, will provide support for all the company’s applications. Steria will also work to create an application development platform using Oracle’s Developer suite.

Amongst many advantages it is hoped that the deal will allow Seguros Lagun Aro’s IT department to focus more clearly on the requirements of their internal business processes, improve the quality of applications whilst achieving a significant cost reductions. It sounds like Seguros Lagun Aro has got the same idea as everyone else when it comes to outsourcing their IT.

BMW, another big name, has signed a five-year ITO contract with IT behemoth, Accenture, to consolidate its information technology processes and applications.

Accenture will help BMW Group consolidate a vendor network of its application operations service providers in areas including production, sales, logistics, finance and human resources. It is hoped that Accenture will also work to make BMW’s overall IT processes more reliable, predictable and efficient. The agreement is designed to help BMW achieve lasting cost reductions by helping the company simplify its processes while improving the overall service levels provided to its business users.

Accenture will deliver the services to BMW Group through its centres in Hyderabad, India; and Munich and Hof, Germany. Sounds like a big job!

Now, back to Twitter…‘Sourcingfocus.com’s News Round-Up successfully completed – rather well if I do say so myself’.

The number of reported outsourcing "megadeals" awarded to a single service provider in 2008 has increased to 12 up from 10 in 2007, according to analyst firm, Gartner. Megadeals are characterised as being worth more than US $1 billion. In terms total contact value (TCV), the total for 2008’s 12 megadeals was US $17.1 billion, compared with US $12 billion for 2007.

However, des[ite the relative increase over the last two years, a recent Gartner report has found an overall decline in TCVs from 2000 to 2006. The average annual TCV of all reported megadeals per year for this period was US $28 billion.

Commenting on the trend, Dean Blackmore, senior research analyst for Gartner, said, “With the increasing popularity of selective sourcing and the trend toward greater control of the buyer, we continue to see both the average value of a deal, and the average duration of a deal decline.”

In all outsourcing deals (not just megadeals), the report shows a definite trend toward a greater number of deals, but for smaller TCVs. In 2008, deals below US $50 million saw a clear increase over 2006 and 2007, but deals over US $50 million saw a collective decline. TVC for all deals in 2008 was US $42.2 billion, which, although an increase over the 2007 figure of US $29.5 billion, can be attributed to the much larger volume of total deals signed in 2008.

“In economic downturns, we closely watch contract reporting as an indicator of the health of the outsourcing market,” said Allie Young, vice president of Gartner. “We have seen some softness in large deal signings, but no catastrophic decline. While economic forces can change priorities, the basic drivers of outsourcing remain intact — organisations still outsource for cost, efficiency, access to skills, focus on core business, innovation, modernisation and even business transformation.”

The largest IT outsourcing (ITO) or business process outsourcing (BPO) contract signed in 2008 was for a TCV of US $2.5 billion. There were two of these size deals, one of which was awarded to TCS. 2008 was the first year that an Indian IT services provider was awarded the largest deal. The two largest deals in 2008 were for the delivery of a combination of ITO and BPO services.

Since 2006 there has been a steady decline in the number of ITO and BPO deals signed in the Americas and a gradual increase in the number signed in the Europe, the Middle East and Africa (EMEA) region. In 2008, EMEA overtook the Americas as the leading geographic region in terms of volume of deals signed. In 2008, there were 162 signed in EMEA and 158 deals signed in the Americas. Deals signed that cover the global IT operations of buyers are also increasing and represented 25 percent of all deals signed in 2008.

“While outsourcing held up in 2008, we expect to see a slowdown in contract signings during the first half of 2009 and possibly extending into the third quarter, largely due to the tightening of IT budgets in the fourth quarter of 2008, and only slow loosening of budgets in early 2009,” said Ms. Young. “Long sales cycles for outsourcing are the norm, depending on the complexity, scale, and scope of the outsourcing deals, which may lead to delayed signings. However, organisations with approval to outsource — and desperate to save money — may seek to move rapidly and shorten some steps of due diligence just to get the deal into place."

Additional information on outsourcing contract trends in 2008 is available in the report “Outsourcing Contracts Annual Review (2008) Shows Outsourcing Growth — But Signs of Change.”

Microsoft has signed a US $170 million ITO contract with India's HCL to support the delivery of its online business productivity suite.

Under the terms of the agreement, lasting five-years, HCL will provide 600 employees to support the contract. 250 employees have already started working on the project.

The online services business is a part of Microsoft’s software-plus services strategy, through which, it provides communications and collaboration software such as e-mail and web conferencing services to enterprises.

Friday the 10th of January went like any other day for Ramalinga Raju – business as usual. His arrest alongside his brother that evening was anything but. From that moment he was the ex-Chairman of one of India's most successful outsourcing companies and exposed as the main perpetrator of the country's biggest ever financial fraud. He and those involved with him had systematically brought Satyam - once a shining paragon of India's outsourcing elite - to its knees. Since the arrest, many more have followed, both at Satyam and their auditors, PriceWaterhouseCoopers, leaving an indelible stain on both companies. The investigation has uncovered over $1bn worth of fraud and the quest to weed out all those culpable and right the wrongs of years of systematic ‘book-cooking’ will continue for some time.

But, emerging from these bleak and embarrassing times for Indian business, comes a ray of light. This week Tech Mahindra, the telecom-focused joint venture between BT and India’s Mahindra and Mahindra, has emerged as the highest bidder in a Satyam centric ‘fire sale’. Instigated by the Government and pushed along by NASSCOM, the industry body for Indian outsourcing, it is hoped the sale will draw a line under the scandal and signal a new beginning for Satyam and the outsourcing industry in general. But will it? Are Satyam’s troubles finally over and can Tech Mahindra, a relatively small fish in the outsourcing pond, make the deal work for the both of them?

“It’s likely the Enron-esque scandal will rumble on for some time. There is still some way to go in sorting out all the problems the company faces,” comments Phil Morris, COO for EquaTerra Europe, a leading advisory firm.

Indeed there is still a big question mark over the company; three more Satyam execs were arrested just last week and investigators are still digging. And, all forward-looking rhetoric aside, there is still no telling just how ingrained the fraud had become and how deep culpability goes. But industry commentators are broadly positive about the move, presumably welcoming a change rather than leaving Satyam to burn slowly to the ground.

None are more positive than Tech Mahindra itself. Preferring not to comment broadly prior to the Company Law Board’s (CLB) final approval [approved this Thursday 16th, ed.], the company issued a gushing press release, “This is a landmark development for Tech Mahindra and I am delighted that we are the highest bidder for Satyam.”

But the industry in general also seems convinced that this really is a new beginning for Satyam. “The fact that this move has been concluded (relatively) quickly is good news for Satyam's customers. The Indian government and the offshore and outsourcing industry in general has operated effectively to make certain that the sell-off off Satyam does not become a protracted experience. The hope of the Indian Government must be that the sell-off draws a line under the Satyam scandal,” commented Alistair Maughan, a Partner at Law Firm, Morrison & Foerster.

However, despite the fact CLB approval has now come through, there is still a long way to go. Mergers and acquisitions are notoriously troublesome for those unprepared and questions still remain over exactly how Tech Mahindra will tackle the numerous challenges to come.

“The merger will stretch them (Tech Mahindra) quite a lot because M&A’s are not something most companies are geared up to tackle. Executives will be challenged and will definitely need outside help to make things work,” commented Phil Morris.

He added, “But it will help them address the limitations of the company and its having been tied into and reliant upon BT. Tech Mahindra has been limited in scope and delivery capability and Satyam gives them a great leg-up.”

The Chairman of Tech Mahindra, Anand Mahindra, sounded confident that the company can fix things, “The Mahindra Group is known for its good governance and the Tech Mahindra team has demonstrated its outstanding customer centric focus over the last many years. I am sure that Satyam’s customers and employees will welcome this news. Looking forward, we are confident that this will lead to a positive transformation in Satyam’s business.”

If Tech Mahindra can make the acquisition work well, it will be a giant leap for the previously telecom’s centric provider. Satyam is an impressive animal delivery-wise and will open Tech Mahindra to clients and delivery capabilities in numerous new industries.

But there is still the matter of customers to consider first. As you would expect during a huge scandal such as this, Satyam has lost a reported 46 customers since the news broke including the lucrative National Australia Bank (NAB) contract. While many larger clients will be weary of risking the upheaval that changing large contract suppliers entails, Tech Mahindra must act fast to placate worries and prevent further client exodus.

“If I was Tech Mahindra or Satyam I would want to rebrand the company as a rebirth and new start. This would mark an end to the affair and I think the market would really understand and get behind such a move,” commented Phil Morris.

A rebrand is certainly an option to address Satyam’s severely damaged brand. But there is more that needs to be done directly to help keep customers on side.

“Once Tech Mahindra takes over, the main focus will be on the customers. Tech Mahindra will need to ensure that it targets the highest profile and highest revenue generating customers with the best prospect of continued relationship and focus absolutely in locking them in and keeping the vultures at bay. TM needs to convince Satyam's key customers that it is big enough and experienced enough in the right sectors to continue to deliver great quality services,” commented, Alistair Maughan.

According to Phil Morris, those customers that decide to stick with Satyam either out of necessity or good faith will also need to do their part to keep things on track during the merger process. “Customers need to work to drive communications going forward and make sure they get Tech Mahindra and Satyam to sit down and talk about continuity of skill and service while changes are taking place.”

It is clear Tech Mahindra’s move is broadly welcomed by the industry but equally certain that there is still a long way to go. Learning from the past and making sure the M&A process is completed as smoothly as possible will be central to the success of the venture. The most important thing, however, has to be transparency. The lack of clarity that has almost been Satyam’s undoing will also make or break it in the future.

Phil Morris succinctly summed it up, “The company must display complete openness and transparency going forward; if they can’t do this, the problems they face now will continue to haunt them for a long time to come.”