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September 1, 2005 8:00 pm

Outsourcing deal marks coming of age for Indian IT

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The worst-kept secret in India’s normally reticent technology services industry has been “the ABN Amro deal”, which finally emerged on Thursday when the Dutch financial services group announced a record €1.8bn ($2.24bn) outsourcing contract.

After more than nine months of negotiations, the deal that has emerged represents the largest of its kind involving Indian information technology companies, marking what many see as a coming of age for Indian IT.

Industry executives in Mumbai say three strategic messages emerge from ABN’s decision to outsource to India large layers of its IT services, primarily maintenance and developing new applications to support business growth in so-called “sweet spots” such as Brazil and India.

First, the announcement of a mega-deal by a European company is what Indian companies have been hoping for. It gives a shove to companies in Europe still wavering over outsourcing, and, in particular, offshoring to India.

Although they are moving swiftly now, companies in Europe are seen as slow movers and two years behind the US, the largest market for Indian IT services. To prepare for an expected rise in offshoring from Europe, leading Indian companies have stepped up their operational presence in Europe.

Second, the transaction marks a decisive shift by customers, from outsourcing their IT infrastructure to one or at most two vendors, to multiple vendors.

In the ABN deal, Tata Consultancy Services, Infosys Technologies and Patni Computer Systems will be the vendors from India, sharing the spoils with International Business Machines and Accenture, the two global giants.

This approach helps makes a clients less vulnerable to business or geopolitical risk by allowing the selection of various vendors that are leaders in their respective areas of expertise. Indian companies, for example, lead in application maintenance, and two-thirds of ABN’s spending in the contract in this one area has gone to a single Indian company. Mr

Nandan Nilekani, Infosys’ chief executive, says: “It’s a way of de-risking but it also allows a client to attract the best of breed.”

Finally, ABN’s decision to bundle Indian companies alongside the likes of IBM and Accenture sends a definitive “message of trust” about Indian capability on contracts of global scale.

“This deal demonstrates that financial services groups, which have led the way with offshore outsourcing, now view Indian companies in the same league as traditional giants,” says Mr Ramesh Venkataraman, head of the technology and telecoms unit at McKinsey, the consultancy, in Mumbai.

TCS and Infosys, the biggest Indian IT companies, have been snapping at the heels of global rivals for several years.

Large contracts are seen as one way of achieving earnings stability – crucial in an industry vulnerable to security scares that can frighten away potential new customers.

In the last quarter, TCS won a $100m deal that excited analysts but which now seems modest.

In the five-year ABN deal, TCS will earn $250m. This will swell with “discretionary projects” such as a $15m contract already awarded to TCS to develop a “banking technology platform.”

Infosys’ share is $140m, which could rise to $240m, it says.     

Companies such as Accenture have privately argued that only they possessed the global scale to manage large IT outsourcing contracts. Yet such has been the pressure of India’s cost-competitive rivalry – wages for IT professionals are a third of those of counterparts in the US – that international companies have had no choice but to scale up their presence in India.

The aim has been to build up a low-cost services arm in India that can achieve the savings that clients are now demanding. IBM has about 23,000 staff in India, including its call-centre arm, while Accenture employs some 15,000 and rising.

The aim has been to replicate Indian companies’ so-called “global delivery model”. TCS, for example, will develop the “banking technology platform” from Hungary, where it owns a software centre.

“This is the global capability that frightens our global rivals,” says Mr S Ramadorai, chief executive of TCS.

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