Coming in ‘09: $4-bn offshoring deals

But Lower Rates Could Dent Earnings By Around $300 Million

TOP outsourcing customers like BT, Citi, GE and Bank of America will award new contracts worth $4 billion to Indian tech biggies TCS, Infosys, Wipro and HCL this year, as these companies seek to cope with tighter IT budgets by sending work to offshore locations such as India.

Among some of the top deals coming to India this year, the $250-million outsourcing contract considered by Australian phone firm Telstra, will be finalised this month end. This will be followed by several $50-$100 million-plus contracts from Citi, BT, GE and other customers. Outsourcing expert Sabyasachi S Sathyaparasad of Mindplex Consulting said new contracts worth almost $4 billion will include long-term application maintenance contracts. However, even as these customers seek to award new projects by renewing existing contracts, Indian vendors could lose over $300 million because of lower billing rates, he added. Vendor rationalisation, savings focus

“MANYlarge customers have reduced their IT budgets by upto 10%, and they plan to seek output-based deliverables from service providers in these difficult times,” he said.

Telstra plans to reduce the number of vendors, have one supplier for each domain across product lines and thus bring down the cost of managing IT systems. “The company wants to move more than half of this contract to an offshore location such as India, and that’s why pure Indian offshore vendors including Infosys, Satyam and EDS-Mphasis are being seriously considered,” said a senior executive at one of the top tech firms bidding for the Telstra contract. He requested anonymity.

Reducing the number of IT vendors from four to two is part of Telstra’s overall transformation strategy. On the procurement side, Telstra has already reduced the number of suppliers by almost 20%, translating into saving of $226 million this year. At a time when companies are seeking ways to cut costs, renegotiation and renewal of contracts by Best Buy, Visa and Nissan, is aimed at achieving significant savings.

Last year, when BT renegotiated its contract with Xansa, the company aimed to save around $123 million over the next six years. However, BT’s restructured deal also witnessed more work for Xansa, estimated to be almost 80% of BT’s overall back-office projects.

Customers including Citibank are also seeking to send more IT projects to offshore locations such as India. “As we face these (economic) challenges, there will be greater demand for moving more work to offshore locations,” Jagdish Rao, global technology head for Citi said during his visit to India last month.

Rao was in the country to announce a six-year and over $500 million, master services agreement with Wipro for infrastructure services and application development. As part of the deal, Wipro acquired Citi Technology Services for around $127 million, which came with Citigroup’s commitment to outsource all future infrastructure management contracts to the company. For phone firms such as Telstra, offshore outsourcing is about consolidation their IT needs and leverage India-based vendors for bringing down the costs. Telstra plans to bring down the number of IT systems from around 1,350 to almost 300 by 2010.

Meanwhile, companies such as Tesco, the world’s third biggest retailer, are already seeing their offshore outsourcing initiatives fetching rich dividends. Mike McNamara, director operations and information technology at Tesco told ET last week that his company would continue to outsource more work to India at its captive centre and to top Indian software vendors such as TCS and Infosys. Tesco saves around $60 million every year by outsourcing to India, which was a compelling enough reason to funnel more work to the country, he said.