Mega Markets and Mega Deals

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.

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

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.

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

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.

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

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

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