Bangalore: The battleground for information technology (IT) outsourcing contracts is set to heat up this year between domestic and foreign software firms, as companies like International Business Machines Corp. (IBM) and Accenture Plc. attempt to prevent losing more outsourcing projects to Indian vendors.
Top executives at Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd, Cognizant Technology Solutions Corp. and HCL Technologies Ltd are gearing up for an intense battle, both against the foreign firms and each other, for outsourcing contracts collectively worth more than $100 billion that are up for renewal this year, according to estimates provided by outsourcing advisory Everest Group.
Two contract renewals likely to be hotly contested are of Australia’s largest phone company Telstra Corp. Ltd and the world’s biggest consumer healthcare products company Johnson & Johnson , according to several outsourcing experts and industry executives.
Telstra signed IT outsourcing agreements with Infosys, Hewlett-Packard-owned Electronic Data Systems Corp. (EDS) and IBM in 2009 for five years, and discussions for their renewals have already begun. The contracts, originally worth about $1 billion, are expected to be bid for at least $1.5-2 billion, the outsourcing experts said.
The renewals come at a time when seasoned customers of Indian IT services are more open to switching vendors, as increased competition for re-bids often tend to lower pricing and boost margins, said Peter Bendor-Samuel, founder and chief executive of Everest Group, in a telephone interview.
Telstra, which had about 10 million domestic mobile subscribers at the time the deal was signed, currently has 14.4 million mobile phone customers in Australia—more than three-fifth of the country’s population—and is trying to cut costs as it battles high smartphone and hardware costs.
Much is at stake for large Indian software companies like Infosys, which has grown at a sluggish pace the last two-three years compared with rivals like TCS and US-based Cognizant that have consistently outdone estimates for revenue growth and are seen as the new sector flag-bearers. Telstra has been a client of Nasdaq-listed Infosys since 2003.
For IBM, holding on to this contract will be crucial, after a separate outsourcing services deal it had with Telstra was scrapped and given to Infosys in 2009. IBM recently also lost outsourcing contracts from US health insurer Wellpoint Inc and financial services provider India Infoline Ltd.
Another company with plenty to lose is Hewlett-Packard Co., the world’s largest personal computer maker that also provides software services. HP recently lost deals to TCS and HCL Tech and experts say the company run by Meg Whitman will be more aggressive in protecting its own turf and going after other contracts.
An IBM spokesperson said her company does not comment on confidential client information, while Johnson & Johnson (J&J), HP, Accenture, Capgemini, TCS, Cognizant, Infosys, Wipro and HCL Tech declined to comment for this story.
“Telstra is a strategic account for Infosys, IBM, and EDS, and a hard one to give up,” said Ray Wang, founder of enterprise research firm Constellation Research Inc.
“The original vendor consolidation deal in 2009 left Telstra with a competitive situation among its suppliers. Many MNCs (multinational companies) like to keep two to three strategic suppliers on board to keep things competitive on price, and to see how innovative the suppliers can become. However, when we see an MNC go sole source, several years later, they will often go back to having multiple vendors because of the lack of competition and innovation,” Wang said. “The Indian IT players can expect a tremendous pressure on pricing but also a new focus on how well they can deliver on innovation in these deals.”
Companies like Telstra and J&J often tend to rebuild the structure of their contracts, breaking them into small pieces and handing them out to multiple vendors, experts say.
“With Telstra, they first signed the agreement with HP through EDS. Then they broke up the structure of the deal and brought in Infosys. Now they’re thinking about the structure of the deal once again. You can expect that contract to be heavily competed,” said Bendor-Samuel.
A Telstra spokeswoman hinted the company might review the structure of the contracts with its current vendors.
“Telstra constantly reviews its supply chain arrangements to make sure it has the right arrangements to support its business. We will review these contracts as part of our ongoing business improvement programme to achieve the best value and outcome while simplifying our business,” the spokeswoman said in an emailed response.
Other large telecom deals for which renewal talks have begun include Bharti Airtel Ltd’s 10-year contract with IBM, estimated to be worth $2.5 billion now, and Uninor’s outsourcing agreements with Wipro.
Johnson & Johnson’s outsourcing contract with top Indian service providers, including Wipro, is also being keenly tracked by the sector. Although the exact value of the J&J deal is unknown, it is estimated to be worth at least $1 billion, according to the outsourcing experts. Discussions for the renewal due next year have begun.
The Johnson & Johnson contract renewal comes at a time when the North American healthcare outsourcing market presents significant opportunities for the Indian IT sector, with US President Barack Obama’s push to overhaul the healthcare system to include 30 million more Americans.
Experts say though there are good chances of companies like Telstra and J&J switching vendors, most contract renewals tend to stay with original vendors. “For Johnson & Johnson or any other large organization, they should not switch the vendor purely based on pricing or unless the vendor has done something terribly wrong,” said Manish Bahl, vice-president and country manager at Forrester Research Inc. “They have already invested a lot in the relationship with their existing vendor and getting a new vendor will take its own ramp-up time in addition to technology or operations related challenges.”