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Mega Markets and Mega Deals

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DQI Bureau
New Update

An

economic slowdown in the US is causing companies to postpone IT investments,

lead ing to a decrease in overall IT services spending. The market for

consulting, systems integration and IT education and training is likely to be

the most visibly hit by the downturn. However, as companies postpone new

hardware and software purchases, the need to maintain existing assets becomes

crucial. Maintenance services, therefore, are likely to not just remain

unaffected, but actually get a boost, with the market for outsourcing services

remaining stable.

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There are two reasons for this:-

  • Large outsourcing contracts being

    signed worldwide are for long periods of time. This insulates them from the

    effects of an economic slowdown as the expenses involved in bringing the

    outsourced process or function back inhouse is higher than continuing with

    the existing arrangement

  • Two of the major drivers of

    outsourcing–lower costs and enhanced focus on core competencies–have

    greater relevance during an economic slowdown. Outsourcing is an excellent

    option for companies when dealing with the business pressures that are

    brought on by a slowdown and the resulting squeeze on profit margins.

West Europe: Motoring mega deals

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This is a key market that Indian companies need to look at closely,

especially as figures clearly show that IT outsourcing is continuing to grow in

this region. Also, the fundamentals and sentiment in the UK, Sweden and the

Netherlands largely drive the market. Consider this–in the third quarter of

2000, as many as 40 deals were signed western Europe, netting $11.5 billion.

Mega deals continue to be signed at an increasing rate in Europe, many being

renewals and extensions. Customers, of late, have been increasingly seeking

strategic consulting as a part of their outsourcing contracts. So what are the

factors driving this? First and most important is the overall confidence in the

outsourcing process. Another reason that western European companies are

embracing outsourcing is their desire to remain competitive with rivals in the

US who have taken to outsourcing and transitioning to e-governance. Also, the

European market itself is getting to be far more competitive.

As a result, corporate customers are looking to focus on core

competencies...and outsourcing is being increasingly accepted in Germany, France

and Italy.

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Dot-coms might have come and gone, leaving little trace except that of

devastation, but the importance of the Internet in business is a fundamental

reality that has changed the pace of business. The Internet and its reach

increased pressure on large companies to transition to new economy business

practices and infrastructure.

What are the ground realities? IBM Global Services and EDS are the Big Two in

the western European sweepstakes. Other vendors who have played a part in mega

deals over the past five years are Andersen Consulting, Computer Science

Corporation, ICL, Nortel, Origin, Perot Systems and Siemens Business Services.

Indian companies like Tata Consultancy Services, NIIT and BFL Software are also

consortium players.

Consortiums and multi-vendor contracts

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Needless to say, these are what are becoming increasingly popular. In a

recent interesting development, end-users with existing services contracts were

also found appointing larger IS contractors to manage other service providers

and suppliers. Examples of this are Andersen Consulting and CSC with the

Saintsbury’s and Whitebread deals, respectively.

This is a great opportunity for Indian companies to become service providers

and play a part in the consortiums.

Another emerging trend is that IT outsourcing contracts are including more

and more services. During the first half of last year, Internet services and

certain kinds of e-business integration services were increasingly being

included in outsourcing arrangements. Now, deals are increasingly including an

e-business consultancy portion to help clients map out a strategy to navigate

the new economy.

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Applications outsourcing will also be a strong opportunity area. A major

force driving the application space is the transition to a new generation

e-business applications and strategy. About 20% of all outsourcing contracts

were pure application outsourcing contracts.

Japan: Asian opportunity

Where Is the Market Headed?

  • The market in Europe is being driven largely by the fundamentals in the UK, Sweden and the Netherlands
  • In the third quarter of 2000, 40 new business deals netting over $11.5 billion were signed in the European region alone
  • The concept of outsourcing is being increasingly accepted in Germany, FranceÂ

    and Italy
  • Indian companies like HCL Infosystems are also focusing on the Japanese market
  • Costs savings are emerging as the biggest reason companies are outsourcing
  • Australian government has expressed interest in outsourcing companies
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From a geographic perspective, Japan is a market that we need to be bullish

on insofar as IT outsourcing is concerned. As companies are looking to reduce

the total cost of systems management, outsourcing is growing. The outsourcing

market in Japan is driven by the need to cut costs and the need for Japanese

corporations to increase business efficiency in order to compete with global

corporations. Large global corporations are the main consumers of outsourcing

services in Japan. Recession has not prevented large global outsourcers from

pursuing the Japanese market, and the slowing global economy should have little

further impact on outsourcing in Japan.

IBM Global Services is the leader in this market– very successful. However,

other vendors like Fujitsu, NEC and Hitachi closely follow IBM Global Services.

They are offering a number of services like systems management, resource

outsourcing, facility outsourcing, and help-desk outsourcing. Although the

outsourcing market is still small, it is growing fast and true, and mid-sized

service vendors are aggressively focusing on this service segment. HCL

Infosystems is also focusing on this market.

Australia: The new tiger

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This has been a region of strong outsourcing activity. The Australian

government and several commercial organizations have expressed their interest in

farming out large pieces of business. The result has been some of the largest

outsourcing deals ever. For instance, September 1997 saw the Commonwealth Bank

of Australia signing a 10-year $2.9-billion outsourcing contract with Electronic

Data Systems.

The Australian government has been a major driver, and a number of government

agencies have been outsourcing their requirements. On 24, April 2001, the

government announced a new policy under, which contracts under A$10 million and

those above that figure would be treated differently. For contracts under A$10

million (US $5.07 million), the only requirement is that the contractor and

sub-contractors be endorsed under the government’s ‘endorsed supplier

arrangement’. For contracts over A$10 million, tenderers must spell out the

level of small and medium enterprise involvement.

Today, service providers headquartered in the US, Western Europe and

Australia are key players. However, in the new emerging environment, Indian

companies are likely to win as part of bigger consortiums, and also selective

outsourcing contracts. This should create new opportunities for Indian companies

here.

Ishan Ranjan is VP, projects, CMIL. He

has also been founder-editor of Voice & Data. Previous columns can also be

read at dqindia.com

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