KOLKATA - The Indian IT (information
technology) sector these days claims that it has
finally attained enough maturity and expertise to
rub shoulders with global giants on multimillion
dollar deals. But Netherlands-based ABN Amro
Bank's outsourcing contract last week - considered
a watershed - proves that local IT companies still
haven't really moved beyond bagging bread crumbs
compared to global giants.
Last week, in
the biggest outsourcing deal ever
to come out of Europe, the ABN Amro Bank awarded a
US$2.2 billion outsourcing contract to IBM, and two Indian
companies - TCS and Infosys. The contract will not only
save ABN Amro $335 million
yearly, but also enable it to
shed excess flab to the extent of 3,200 jobs, 2000
of which could be transferred to vendors in India
with which it has signed the deal. ABN Amro has
also retained IBM, Accenture, TCS, Infosys, and
Patni Computers (also an Indian IT company) for
application development work, the monetary value
of which has not been revealed.
More than
the total size of the deal and the number of
workers that ABN Amro gets to shed as a result of
this deal, what is important from the Indian point
of view is that the two local IT biggies - TCS and
Infosys - have respectively got $260 million and
$140 million of the total outsourcing order, each
being the largest single deal bagged by them
individually. Indian IT companies generally get
contracts worth $25-30 million. If the client is
satisfied, the deal size goes up a bit, but over
an extended period.
For the next five
years, TCS will provide application support and
enhancement services for the bank's operations in
the Netherlands and Brazil as well as its private
client business in South America, while Infosys
will provide application support for the bank's
operations in North America, parts of Europe and
new-growth markets such as Hong Kong, Taiwan and
Singapore.
This deal reinforces that fact
that "Indian IT firms have arrived in large direct
offshoring deals", says Sidharth Pai, managing
director of TPI India, the consultant that managed
this deal for ABN Amro. CEOs of both TCS and
Infosys have said it clearly indicates that large
offshore players like them have a competitive
business model to deliver large, global,
multi-year contracts.
But even as the
local IT sector rejoices on their latest feat, the
question is, has the country's outsourcing sector
really been able to overcome competition from
multinational IT companies that are beginning to
make a larger dent on the operations of
established Indian IT players? Consider this.
Although it comes as the largest single deal for
the two companies, IBM still gets the lion's
share. IBM has been entrusted to look after the
entire information technology infrastructure of
the bank, for which it gets to keep $1.8 billion
of the $2.2 billion contract.
And,
although $400 million (the total value of the
contract bagged by the Indian companies) looks
big, it doesn't contribute much in terms of yearly
revenues and margins. Analysts say, for Infosys,
incremental gains in terms of revenues for 2006
could be less than 1% of its total revenues and
even in 2007, the deal could account for about
1.5% of the total. Similar would be the impact on
margins or profitability. Reportedly, Infosys
expects negligible margins in the first year, and
"normal" margins through the life of the deal,
while for TCS (which is a $1-billion-plus revenue
company), "the relatively small yearly revenue
($260 million over five years) compared to its
overall size, would have no significant impact on
the company's overall margins, said analysts.
This contract could be yet another
indication that contrary to the vehement denial of
the local IT companies, competition from their MNC
counterparts is beginning to make a dent in their
operations, squeezing both revenues and margins.
Much of this, in fact, has been triggered by
India's own IT success. Until a few years back,
owing to the complexities involved in outsourcing
to distant destinations, MNCs were hesitant in
taking up offshore work, which in fact was a boon
for Indian outsourcing service providers. But over
the years, driven by the success of Indian
outsourcing model, MNCs like IBM, Accenture, EDS,
PricewaterhouseCoopers, Ernst & Young and most
other global biggies have become aggressive in the
offshore segment, resulting in deals flowing away
from Indian players to these MNCs.
Bill
Green, CEO of Accenture, has admitted that going
offshore has emerged as an important growth
opportunity, which has moved Accenture [and other
MNCs] "to be more aggressive in India". Green also
said the decision of these MNCs to go offshore has
also enabled them to bag additional outsourcing
contracts, which otherwise would not have been
outsourced at all.
Nevertheless, the ABN
deal is important for India. Not just because of
the size but according to Shekhar Singh of ICICI
Securities, "this could spur other European
companies to lean toward India for software
services outsourcing. Until now, only the US has
been the main export destination (accounting for
about 65% of export revenues) for Indian software
exporters."
The country is also hoping
that large global offshore services seekers that
have hitherto followed a fragmented approach to
outsourcing will follow ABN Amro's example of
awarding larger chunks of outsourcing work.
"Indian IT companies have successfully expanded
the offshoring model to newer service lines. We
expect more such contracts ahead," said Singh.
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
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