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Insurance firms, banks renegotiate IT contracts

Insurance firms, banks renegotiate IT contracts
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First Published: Mon, Nov 16 2009. 12 30 AM IST

Graphics: Yogesh Kumar / Mint
Graphics: Yogesh Kumar / Mint
Updated: Fri, Nov 20 2009. 05 24 PM IST
Mumbai: India’s lenders and insurers are renegotiating contracts worth at least $800 million (Rs3,720 crore) with information technology (IT) firms, seeking more for less as they seek to cut costs and improve efficiency.
Banking and insurance companies that outsourced long-term deals in the past two-three years are now going back to vendors for price cuts or asking for more IT services at the same price, according to an October survey of chief information officers who head IT divisions of large Indian enterprises.
The survey was conducted by Everest Research Institute, the market research arm of Dallas, US-based outsourcing consultancy Everest Group Inc.
Graphics: Yogesh Kumar / Mint
“Companies are now going back to their IT vendors and saying that now they want the IT systems to not just support growth but help them improve what they already do, and more importantly, improve their overall cost structure,” said Gaurav Gupta, country head of the Indian arm of Everest Research. “Things have changed since the time these contracts were signed.”
This trend has also been confirmed by the Indian arm of technology researcher Gartner Inc.
As a result of these new negotiations, the IT companies involved could be staring at reduced revenue or volume, and the variation could be as much as 20%, analysts said.
“Clients will continue to seek realignment of long-term contracts with a view to cut costs,” as business environment changes, said Diptarup Chakraborti, principal research analyst at Gartner’s India unit.
The process would rarely lead to changing vendors but could mean lower realizations and volumes, said Vikash Jain, associate principal at Everest Research.
“We have gone back to our vendor recently and will do so again,” said Anil Jaggia, chief information officer at HDFC Bank Ltd, which has outsourced a $80 million contract to Wipro Ltd that continues till 2016. “Even if we don’t explicitly seek billing discounts, we negotiate with the vendors for getting more services under the same contracts.”
One significant aspect of the renewed talks is that clients are seeking a change in the way services are billed, from an earlier model of pricing on number of computer professionals deployed to one where payments are linked to performance improvement or savings due to IT services.
“We have gone back to our technology vendors seeking more and more, in our efforts to leverage technology for growth,” said Hitesh Arora, executive vice-president and head, information technology, at Max New York Life Insurance Co. Ltd, which has signed a $450 million, multi-year outsourcing contract with International Business Machines Corp., or IBM, lasting till September 2018. “One way we have restructured our IT contracts is by seeking to move from a people-based billing model to a services-based model.”
Some firms that have outsourced smaller and shorter IT contracts say they are better-off as they have more bargaining power.
“It is harder to negotiate when you have one large outsourcing partner as opposed to several ones with smaller contracts,” said T.K. Shrivastav, general manager, IT, at Union Bank of India. The mid-sized bank keeps reviewing smaller contracts with companies that include Infosys Technologies Ltd and Hewlett-Packard Co. (HP), Shrivastav said.
Some IT firms that Mint contacted declined to discuss client or contract details but others acknowledged that customers are renegotiating and seeking more for less.
“We have seen requests for more services or software products for the same contract, especially from clients in manufacturing and automotive verticals, as well as retail and insurance,” said Srinivasa Raghavan, who heads Tata Consultancy Services Ltd’s (TCS) Indian business unit.
Ramesh Narasimhan, director at IBM India, said there is no real slowdown in the Indian market, but declined to discuss client details.
Bank of India, Wipro and Hewlett-Packard did not respond to Mint’s queries. ICICI Bank Ltddeclined to comment, citing non-disclosure agreements with vendors.
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First Published: Mon, Nov 16 2009. 12 30 AM IST