Financial Daily from THE HINDU group of publications
Wednesday, Sep 25, 2002
Indian cos eyeing larger share in outsourcing
Raja Simhan T.E.
CHENNAI, Sept. 24
LARGE Indian IT companies, including Tata Consultancy Services (TCS), are going a step further in getting large and long-term multi-million outsourcing business in Europe, particularly the UK.
The deal involves taking over the complete asset (like software and hardware) and even employees of an IT division of a firm, in any sector. The supplier in turn provides complete IT services for the company on a long-term contract.
Hitherto, only multinationals such as Accenture, EDS and IBM have been successfully doing such large outsourcing projects. These companies in turn outsourced their requirement from various vendors including Indian software firms. While the multinationals had a large share, the Indian companies had a smaller piece of the cake.
However, having realised the vast potential such projects offer, the large Indian firms have started directly to bid for such multi-million outsourcing projects and fight against such giants, said Mr Murali Neelakantan, Solicitor, Simmons & Simmons, a London-based law firm.
The average revenue size of the deal could be around $150 million per year, he added. Simmons & Simmons is working with an Indian software company on outsourcing projects.
The outsourcing projects works like this. A manufacturing firm has a large in-house IT division. The supplier of IT services would bid for taking the assets and people of the division on its roll and in turn provide complete IT services.
This includes software, hardware, upgrade and maintenance. Through this arrangement the manufacturing company not only gets a cost saving of 30-40 per cent, but also gets efficient services. The arrangement also allows the company to concentrate on its core competence, which is manufacturing, he said.
Talking to Business Line he said, ``In the last couple of years, some of the Indian IT firms did bid for such large projects, but were unsuccessful due to lack of knowledge of the local industry, which is quite complicated. The Indian firms could not go beyond the RFP (request for proposal) stage and were out-bid by the multinationals. Taking such a decision is not going to be easy. It is quite risk prone (since the asset and capital would come into the supplier's books) business and involves a huge management back up. Further, a lot of homework needs to be done before entering the market.'' For the first couple of years there may not be much return. However, on a long term the IT firm will benefit the Indian firms, he added.
Said a TCS spokesperson, ``TCS has learnt enormously on issues of asset transfer as well as TUPE Transfer of Undertakings (Protection of Employment) Regulations 1981 of the UK, which governs such projects. So, in principle we are open to such bids and are speaking to some clients on this in a qualified manner. We tried the model a couple of years ago, but were unsuccessful.''
When asked for their views on the matter a Wipro spokesperson said, ``we will not be able to discuss the orders we are pursuing and the difficulties we faced in getting an order. Added to that we are very close to the Q2 results and are in the silent period.''
An Infosys spokesperson said the company was unable to comment on the types of projects they are pitching for and neither will they talk about competition directly. Also, the company was in a quiet period before the results.
According to Mr Neelakantan, with a large pool of skilled labour force, Indian firms can score over multinationals. Further, Indian firms can work on 70:30 ratio 70 per cent offshore, on which Indian companies are strong, and 30 per cent onsite. Through this arrangement, Indian firms need not spend too much on manpower cost compared to the multinationals, he said.
Typically, in a large outsourcing project in which Indian companies are bidding works like this. Organisations looking to maximise the value of sourcing and leverage the value of an internal capability will take a value-based approach. This is where the supplier acquires a valuable business operation from the client in return for reduced rates, and an equity position in the supplier.
One of the successful examples of the former is when Bell Canada sold its applications activities to CGI for an equity position in CGI. The latter was able to grow and expand its business in the US from the large base that Bell Canada provided. Bell Canada received a better service that was more flexible, along with an equity stake that increased five-fold during a five-year period.
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