Crumbs to big cheese

The recent ABN Amro contracts mark the entry of Indian players into the rarefied world of technology services mega deals

One swallow does not make a summer, said Aristotle. Perhaps not. But this is one gulp "" pardon the pun "" that could signal an Indian summer for our increasingly aggressive information technology industry. Last month's announcement that Indian companies had gnawed almost a one-fifth chunk off ABN Amro's $2.34 billion technology services contract clearly marks a new highpoint.

"We were treated as global companies and were negotiating at the same table as the IBMs and Accentures of the world," says a beaming Nandan M Nilekani, chief executive officer & managing director at Infosys Ltd, one of the three Indian vendors chosen by the Dutch banking group in the face of stiff global competition.

Nilekani has good reason to be happy. Bangalore-based Infosys stands to make $140 million over the next five years for application development, support and enhancements for the bank across geographies in the largest deal it has ever signed.

Nor is he the only one uncorking the bubbly. Tata Consultancy Services (TCS) will earn $260 million for similar work, while fellow Mumbaikar Patni Computer Systems will make a substantial "" although yet undisclosed "" amount on application contracts.

"The deal puts us on a level playing field with global vendors," says Patni executive vice-president Mrinal Sattawala.

Indeed, it does. The three Indian companies battled over a dozen global IT majors "" including the $15 billion Accenture, the world's largest technology consulting firm "" for more than 14 months to break into Europe's mega deal market. The real payoff: actual earnings promise to be three times the present deals once the value of software development contracts is announced.

Tempering the celebrations, however, was the stark fact that a lion's share of the mega deal "" worth around $1.8 billion "" went to IBM, which will oversee the bank's entire technology infrastructure. And therein lies the rub. Because while a handful of Indian companies have won deals worth between $50 million and $1 billion (constituting 44 per centof the global technology services outsourcing market), not a single one has ever bagged a deal above $1 billion.

"Most of the multi vendor mega deals are being won by large, global IT companies. Even in the case of the ABN Amro deal, Indian companies did not risk bidding for asset and people takeovers, nor are they globalising their operations to build multiple country capabilities. Without these, they cannot be players in such mega deals," says Siddharth Pai, a partner at global sourcing consultants TPI, which advised ABN Amro.

The industry's newfound confidence following the ABN Amro deal, however, could change that. "There are at least 20-25 deals which are of a similar size to that of ABN Amro. Even if Indian IT companies get five or six of them, you are talking in terms of huge revenues," explains Patni vice-president Deepak Khosla.

That means even if Indian firms bag contracts comparable to the one announced last month, they could generate $3 billion in revenues "" equivalent to the total turnover of Patni and TCS combined.

The good news is that many of the mega deals signed in the 1990s are now coming up for review. And most clients are planning to offer these contracts to several vendors rather than to just one.

Among those that will soon be up for grabs: the ten-year-old, $1.8 billion-a-year Electronic Data Systems (contract with General Motors (GM). Industry sources say Wipro Technologies is one of the Indian companies pitching for this mega deal. Even more enticing is the recent announcement by GM that it could spend $15 billion on IT services over the next five years.

"I see the number of Indian IT companies participating in mega deals above $1 billion going up to 20 per cent," says Partha Iyengar, IT analyst at research firm Gartner."

Helping them along that route are existing clients in markets like the US who are ramping up their contracts with services vendors. As a result, Indian IT companies are increasingly participating in larger and larger deals. "Clients that have had relationships with Indian IT companies for three to four years are upscaling the engagement and the latter are nibbling away at business now with the global players," says Iyengar.

The facts speak for themselves. The number of clients who billed over $10 million annually for the big four (TCS, Infosys, Wipro and Satyam) is expected to grow by over 50 per cent between the first and fourth quarters of 2005.

As much as 70 per cent of TCS's contracts are long-term deals ranging from two to three years. Wipro expects the number of clients that bill more than $10 million to grow by 20-30 per cent in the next 12 months. Gartner predicts that average deal sizes in the next 12 to 18 months would virtually double from $25-30 million to $40-45 million for India's top tier IT companies.

Of course, this new window of opportunity has been opened by two fundamental changes in the way clients are looking at IT outsourcing. Firstly, clients are moving from tactical (read: short-term engagements based on specific projects) to strategic outsourcing. Secondly, the days of the single-vendor mega contract are almost over.

Says Sudeep Banerjee, president at Wipro Technologies: "Earlier, outsourcing was tactical: any overflows on projects where the company did not have people were outsourced. Today, clients are looking at long-term partners operating in different geographies who can provide multiple services."

As a result of this trend, large contracts are typically being unbundled into separate infrastructure, maintenance and software development deals. For the client, the multiple vendor approach has several benefits such as a better price, greater flexibility, improved quality and more innovation. This unbundling has also proved a boon to Indian IT companies who are now leveraging the time-tested offshore delivery system to offer cheaper, high quality services.

"We are offering best-in-class service, that is why they are taking away business from others and giving it to us. It also shows we have a competitive model to deliver to clients," says Nilekani.

Moreover, domestic IT firms earlier balked at pitching for mega deals because they had neither the financial muscle nor the experience to get into asset takeovers. In many cases, the value of the assets taken over was bigger than the entire turnover of most Indian IT firms. But now with asset management, maintenance and software development being split up, domestic tech firms prefer to pitch for larger contracts in which they have a more significant involvement.

"As you grow bigger, servicing too many clients dissipates management time and bandwidth. So it makes sense to have a smaller number of clients but develop a deeper relationship which means more revenues," explains Banerjee.

That's not to say that no effort is being made to bid for asset takeovers, the largest chunk of these mega deals. Industry insiders point out that several Indian companies did bid for the asset takeover slice in the ABN Amro deal in collaboration with specialised global partners but failed to impress.

Even so, there is hope for the future. Bidding for infrastructure requires sound financials and the ability to manage the assets. Iyengar says Indian companies can play the latter role: "They can remotely manage infrastructure at a fraction of the cost from India. All they have to do is to find partners who will do the rest."

At the same time, industry watchers have voiced two main questions regarding the decision by Indian IT companies to pitch for larger contracts: do they have the manpower to handle them? And will they be forced to reduce billing rates leading to pressure on their margins? Sattawala says manpower is no problem because companies like Patni always work on 70 per cent manpower utilisation and have enough surplus capacity available to deploy in such mega deals.

Opinion is divided, though, on the effect on profitability and margins. Admits industry association Nasscom's vice-president, Sunil Mehta: "Profitability does fall by two to five percentage points in the first two years, but that is corrected in the next few years." TCS's chief financial officer S Mahalingam feels that the effect on margins is exaggerated. "Billing rates might go down but margins can be controlled," he says.

Nilekani, on the other hand, points out that the fear of pressure on margins is unfounded. Infosys, he says, has been given premium rates for the ABN Amro deal. Moreover, as a result of the five-year contract period, the company will be able to drive in efficiencies by saving on marketing and sales costs.

Be that as it may, Indian tech companies still have a long way to climb up the ladder of large global contracts. Says Sheeroy D Desai, chief operating officer at global IT major Sapient Inc: "If you are asking whether we are competing with Indian IT companies in every big deal, the answer is no. They are not seen in IT outsouring projects which are complex in nature."

Others prefer to put the ABN Amro deal in perspective. Says a senior executive in one of the leading Indian IT firms: "A hundred million dollars annually is big for an Indian IT company. For the global boys it is second nature. We are making it look too significant. Look at the multi-billion dollar deals they do. We pale into insignificance." That may be true, but some players are certainly scaling up to the rarefied realm of mega deals one rung at a time.