IT Outsourcing M&A frenzy to continue as tech, BPO vendors seek recurring revenues!

It is very obvious that this market will contract dramatically to the point that most of the clients that are locked in several containers would be up for new parent. This parent could be a tech vendor and I guess we still ahven’t figured out how it seems to have HP, IBM or Dell as you IT outsourcing provider, instead of EDS, IBM, Perot….Wait a minute did I say IBM!

Price Wars!

You get my point. In a couple of years it will be regular practice to see your tech vendor or your vendor as the one-stop-shop shop. They deliver hardware, they deliver software and we don’t have any form of IT headache. This is where most customers are heading for. I guess the world for the mid-sized customers may look a lot different as Google, Microsoft, Amazon would go for that kind of market and a place where Amazon is already tied up pretty tight with Cap Gemini to take on the battle with the likes of Indian and other firms on the price wars.

Price wars will come in all directions. All the fight of getting the best at the cheapest will drive IT outsourcing firms from India nuts as the like of Google, Amazon move towards providing low-cost ownerships of IT assets. IT outsourcing firm such as Cap Gemini might be very lucrative firm to have in your pocket , and I am not suggesting any names here, to do the Amazon-proxy private VDC (Virtual Data Center).

Cloud enhancements and technological innovations will drive costs further down

Traditional IT outsourcers and even the smartest of Indian IT outsourcers such as TCS, Mahindra, HCL, Wipro, Infotech might have to do some M&A, even if it is a small Cloud start-up to amass just-enough engineering talent to run massive loads on commodity hardware. As the software smarts get smarter and as the resiliency level rises, the hardware demands would change from: “We need state-of-the-art hardware” to “We need refurbished hardware coz our software is resilient and FT-aware at the core and at end-points”

Technology vendors like ARM will rise as others will experience dramatic drop in revenues. ARM is going after the soft-middle, not all the way to the enterprise core but in the typical fashion as describe by Clayton Christensen, they move up while the others ignore it till the trajectories meet at “breakable hardware with resilient 4th gen software” which gets defined as the new middle.

A lot is changing and I personally see huge opportunities for a lot of smart folks out there. Remember all these mergers are also leaving gaping holes in their wake which will be needing to be filled as well.

M&A : System vendors are viewing pretty horizontally right now

While we keep pondering over Cisco and EMC’s Joint venture, Cisco could also do better picking up a large IT outsourcer such as CSC. I do also think that Oracle will go after some IT outsourcer, could it be an Indian firm. You just never know. Larry Ellison did mention that it is all coming down to engineering and talent.

Basically the deal is that any Systems vendor is looking really hard to ensure that all the stuff they produce is also getting some sort of recurring revenue. IT outsourcing firms, the smarter and the leaner ones, do that pretty well. They have fared pretty ok as the enterprise market [read: clients] have also kind of stayed-put with the outsourcers. This is a great proposition for a systems vendor such as Oracle who has just acquired Sun and is looking to have a few decent recurring revenues years before the heavans start falling again. That is when the world would have gone pink [check my Cloud Computing talk at BrightTalk and the modified version that I'll be presenting at IT Showcase in Kuala Lumpur on the 6th Oct 2009] and then the resiliency and reliability of data/information would have taken to the public clouds with billing models that would be very much on-demand/on-consumption.

In closing: Stay paranoid or die

So a lot is going to change by Q4 2010. I can not imagine what but if you look back then names such as Sun, Nortel, Enron, etc — all companies will several hundreds of billions of dollars — looked invincible. where are they now? Same fate awaits many who are not staying paranoid.

Now some tip from the article:

Among those likely to enter the M&A fray are CSC, CGI, Unisys, Capgemini and Atos Origin, says Peter Bendor-Samuel, CEO of outsourcing advisory Everest Group.

In addition, says Fersht, pure-play BPO providers-such as Genpact, WNS and EXL-may seek synergies with IT service providers in the next year.

Who will be next and what size the deal will be is anyone’s guess, says Anderson. Barring big global conglomerates like IBM and HP, any provider could find itself at the table being acquired, he says.

Those IT service suppliers who hope to successfully compete for business with both the outsourcing behemoths and offshore-centric providers must steer clear of IT services where the only differentiator is price, such as ERP development and services.

Source

No related posts.

Leave a comment