IT Outsourcing Deals Worth $1 Bn in Limbo

The fate of over a billion dollars worth of information technology (IT) outsourcing contracts is in a limbo after on Thursday’s Supreme Court verdict cancelling 122 licences of telecom firms. For, the order comes at a time when both Indian and multi-national IT firms like Wipro, Tech Mahindra and IBM, besides business process firms such as Firstsource, Intelenet and Aegis, have signed multi-million dollar deals with telecom firms including Uninor, Etisalat DB, Videocon and Idea.

For instance, Wipro had signed an estimated $500-600 million outsourcing deal with Uninor in 2009. Similarly, Tech Mahindra had signed an outsourcing deal from Etisalat, with a revenue estimate of $400-500 million. MNC firm IBM, which has a $1 billion outsourcing deal with Bharti-Airtel, had also bagged a $200-million deal from Videocon-led Datacom Solutions.

Tech Mahindra, when contacted, said it was aware of the matter and were “closely monitoring” the development. “At this point in time, we would not be able to offer any comment. Further, as a policy, we do not comment on any details pertaining to client-specific engagements,”it said. Tech Mahindra had won deals from Etisalat and Sistema Shyam. An estimated 500 employees manage the Etisalat deal at Tech Mahindra.

“The verdict will have a domino effect on both vendors and suppliers,” according to Kamlesh Bhatia, Research Director, Gartner. “The only way IT vendors can mitigate a large-scale impact is if the contract had factored in some market risk. Even then, there will be an impact.” Bhatia says these deals were signed during 2009-10, when the telecom vendor segment was much more mature. “Most of these contracts would be structured as partnerships with revenue related to the milestones achieved by the telecom vendors. Many would even incorporate a situation where the company might wind up operations. Some might also have asked for an upfront capital investment from the telcos, which might buffer the vendors. But even then, there will be considerable impact,” he notes.

Firstsource that provides services to telcos like Airtel, Idea and Vodafone says the BPO firm does work with a few telecom players in India. Yet, “the circle that we work have not been impacted by the Supreme Court verdict. There is only one circle where one of our customer has been impacted. But that will have a marginal impact on us.” The company’s telecom unit employs close to 12,000 people.

Jaideep Ghosh, partner, KPMG, believes that barring a few contracts, the entire ecosystem —both IT vendors and tower companies — will be negatively impacted, unless the situation changes for good in the next two to four months. “All the contracts would have an element of risk and payment. But keeping the current situation in mind, many might have to be renegotiated,” he adds.

Aegis says it cannot comment on individual clients. “The overall impact of today’s judgement will be very minimal, amounting to under one per cent of our domestic business,” according to the spokesperson of the Essar Group technology and BPO arm, when contacted. The court has asked the government to take steps within a month on the recommendations given by the telecom regulator, saying spectrum would be allocated through auctions within four months. This time-frame, experts say, will be lend a “breathing space” to the operators to act on the order.

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