Corporates restructure mega deals

Prefer offshoring to outsourcing.

Indian players and global multinationals, which have outsourced their information technology (IT) businesses, are opting for short-term negotiations with vendors rather than going for rebidding since the change costs are prohibitively high.

In the US alone, there has also been a 60 per cent year-on-year (Y-o-Y) drop -- from $24.1 billion in 2006 to $9.7 billion in 2007 -- in the total contract value (TCV) of contracts awarded. The Y-o-Y drop was greater in the Business Process Outsourcing (BPO) industry at 36 per cent as compared to the IT outsourcing industry's 19 per cent for the same period.

The decline in the number of outsourcing agreements, and relatively-soft outlook for 2007 "is driven by the fact that offshore tasking is considered a preferred alternative to outsourcing among corporates," according to a new TPI report. The reasons for increasing offshoring among corporates include the labour arbitrage focus which is compensating for overall decline in commercial outsourcing. Also the complexities of managing outsourcing contracts and often-unfulfilled expectations of receiving benefits beyond cost savings -"� such as those from innovation and operational transformation -- is driving corporates to take to offshoring.

"The global outsourcing industry is seeing a significant drop in the number of multi-billion contracts that coming to the market for rebidding, as corporates opt for short-term renegotiations with incumbents," Siddharth Pai, partner and managing director, TPI Advisory Services, told Business Standard. "Over 90 per cent of the incumbents -- Indian heritage players and global MNCs have retained their existing contracts and the market share allocation which would have happened with rebidding has not happened," he added.

Incidentally, the changes in the first half of financial year 2007-08 include a decrease in the number of contracts. However, for the 'new scope' market, there has been a slight increase in the total contract value (TCV) and actual contract value (ACV), according to a new TPI report. With America showing a restrained growth, the trajectory for 2007 is expected to yield lagging full-year results in both the TCV and ACV. "The Year-on-Year (Y-o-Y) comparison of industry-wide contracts with a TCV greater than $50 million for the first six months of 2007 was $32.9 billion -- significantly lower compared to the average for the corresponding period for the last six years at $42.63 billion," according to the report.

The reasons for increasing offshoring among corporates include the labour arbitrage focus which is compensating for overall decline in commercial outsourcing. Also the complexities of managing outsourcing contracts and often-unfulfilled expectations of receiving benefits beyond cost savings "� such as those from innovation and operational transformation -- is driving corporates to take to offshoring.

However, public-sector outsourcing remains robust and service providers acknowledge that some sizeable outsourcing transactions remain in their pipelines."Restructurings will account for a majority $10.14 billion of our overall pipeline this year, with just a mere $2 billion up for award in next three months, $2.72 billion in quarter IV of 2007 and $1.97 billion in quarter I of 2008," said Pai. The company is the advisor on over 50 percent of the transactions that use an outsourcing advisor, and over 25 percent of the global commercial outsourcing TCV awarded each year.