Multinationals giving Indian IT a
big fight By Indrajit Basu
KOLKATA - With a formal announcement this
week of its intention to acquire a majority stake
in Mphasis, a Bangalore-based applications and
business process outsourcing (BPO) services
company, for US$383 million, Electronic Data
Systems Corp (EDS), a Plano, Texas-based global
technology services company, became the latest
information-technology multinational
to join the slugfest
between IT multinational corporations (MNCs) and
top-tier Indian IT companies to grab a bigger
slice of the global IT outsourcing pie.
Ever since last September, when Tata
Consultancy Services Ltd (TCS), Infosys, Wipro,
Hindustan Computers Ltd (HCL) and Patni, a few of
India's top IT companies, started grabbing an
unexpected, albeit small, share of the billions of
dollars of outsourcing contracts that were
hitherto meant only for the MNC IT companies, the
Big Six of the latter - namely Accenture,
Affiliated Computer Services (ACS), Computer
Sciences Corp (CSC), EDS, Hewlett-Packard (HP) and
IBM - have been worried.
"Indian companies
are not satisfied playing the second fiddle
anymore. They are competing big with the global IT
companies," said Kiran Karnik, president of the
National Association of Software and Services
Companies (NASSCOM), India's IT industry lobby.
Chet Kamat, managing partner of Accenture
India admitted that large Indian IT players are
getting into deals "where only Accenture, EDS or
IBM were considered", although he quickly added
that "they aren't expected to be significant
threats any time soon".
Still, the worried
IT MNCs are ramping up their Indian operations as
never before to cash in on the low-cost offshore
strategy that their Indian counterparts have been
using for more than a decade to grab the largest
share of the global offshore outsourcing pie.
Early this week, EDS made an open offer to
buy 83 million shares, or a 52% stake, in Mphasis
BFL at $4.58 per share. Of course the offer is
contingent on Mphasis shareholders' willingness to
sell out to EDS - because after the offer, share
prices have crossed $5 each, and EDS has not
committed to revising its offer price yet - but if
this offer goes through, the deal would perhaps be
the biggest buyout of a BPO firm in India to date.
"This offer is complementary to our
overall strategy to enhance EDS's presence and
capabilities in India," said Mike Jordan, chairman
and chief executive officer of EDS.
EDS is
not the only one of the Big Six to have enhanced
its presence and capabilities in India; the rest
are ramping up aggressively as well. For instance,
just two days after the EDS announcement, Computer
Sciences Corp India, a wholly owned subsidiary of
California-based CSC, said it was expanding its
Indian operations "to support CSC's aggressive
growth objectives". The rest of the pack -
Accenture, ACS, HP and IBM - started their spurt
of expansions long before.
Indeed, say
industry sources, the Big Six are under pressure
to hold on to their share as the Indian IT
companies have increasingly started encroaching on
the their turf. For instance, last September the
Indian trio TCS, Infosys and Patni Computers
managed to grab a significant portion ($400
million) worth of the $2.2 billion IT outsourcing
contract that IBM thought was coming its way.
Although IBM still managed to walk away with the
remainder of the deal, it was, according to a
Patni spokesperson, a breakthrough deal because
Indian IT companies bagged a chance to dance with
the MNCs for the first time ever. Soon HCL
Computers - yet another top Indian IT company -
managed to bag a $335 million deal from European
retailer DSG International.
But what
caused the biggest churn in the global IT
outsourcing arena was the huge package of
outsourcing contracts worth $7.5 billion that
General Motors announced at the beginning of
February. It saw EDS, GM's longtime primary
supplier, losing ground while HP, ignored at
times, got a lift. Although EDS, which was used to
bagging about two-thirds of GM's outsourcing
business, still managed to win $3.8 billion, or
about half, of the total deal, IBM, France's Cap
Gemini, and Compuware Covisint along with HP ended
up as the biggest encroachers.
But most
significant, for the first time ever, GM
recognized Wipro, one of India's top five IT
services companies, as its Tier 1 supplier by
awarding it a $27 million contract directly, which
Wipro says will scale up to $300 million over the
next five years.
"The dominance of the Big
Six [in] outsourcing is getting challenged," said
Dennis McGuire, founder and chairman of TPI, which
claims to be the largest outsourcing advisory
firm.
According to TPI, 293 contracts were
signed in 2005, more than in any other year. Of
these 70% were small-to-medium-sized contracts
worth $50 million to $200 million; of these,
Indian IT firms were invited to pitch for 30% and
went on to win 70%.
"The trend to a larger
number of smaller single-function contracts and
the increasing use of multiple providers is
creating opportunities for a wider range of
providers, but diluting the competitive advantage
of the Big Six," said Siddharth Pai, leader of
TPI's Global Service Delivery group, who heads its
office in Bangalore.
However, the stakes
for the Big Six could get even higher. That's
because, says TPI, about $100 billion worth of
major outsourcing contracts are expected to come
up for renewals in the next two years, about
two-thirds of which have the Big Six as
incumbents. Of the $100 billion, it is estimated
that about $50 billion is the combined share of
IBM and EDS.
And almost all top IT
companies are expanding, or getting into
acquisitions, as well as adding competencies and
deepening domain knowledge to compete with the Big
Six and grab as much as they can away from them.
Consequently, according to AMR Research, the
US-based advisory research firm, large Indian IT
companies will continue to eat into the market
share of global outsourcing firms such as EDS and
IBM.
That is why the Big Six are "fighting
back too", said Pai of TPI. For one, the Big Six
are ramping up their Indian operations on a war
footing "so that they too can offer the
India-advantage touted by the Indian IT firms".
Why does EDS needs Mphasis? Because its
global customers have been insisting it lower its
prices and create an offshore presence. With $350
million in annual revenues, Mphasis is known for
its deep domain knowledge in the banking and
financial-services industry as well as its clients
in multiple industries, including transportation,
technology and health care. It recently indicated
its ambition to scale the $1 billion revenue mark
and reach an employee strength of 50,000 by 2010.
Besides the Mphasis move, EDS is also
investing $35 million in India to expand its own
operations. Though EDS is the second-largest
software-services company in the world, it has not
been able to grow its operations in India as peers
IBM and Accenture have done. IBM, for instance,
has a head count of more than 38,000 professionals
and achieved a revenue growth exceeding 50% in
2005. Accenture has a head count of 17,000, and
both HP (about 10,000) and CSC (about 5,000) have
larger operations in India than EDS's
approximately 3,000 (slated to go up to about
6,000 after the $35 million expansion), signifying
that although EDS is the second-largest
software-services company in the world, its
immediate MNC competitors have bypassed it by
leaps and bounds in India.
The near-term
outlook for the industry will likely feature a
brutal period of competition between the Big Six
and the domestic Indian players. This will not be
easy for the latter: while the Big Six are setting
up offshore service centers all over the world and
offering their clients an array of destinations,
"Indian firms are still not sufficiently
globalized and offer primarily the India
advantage," said Pai.
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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