IT outsourcing deals with Indian telecos in a fix

February 6, 2012: The destiny of over one billion dollar worth Information Technology outsourcing deals is in a state of uncertainty as the Supreme Court of India had issued orders to cancel 122 licenses of telecommunication firms in India. The Supreme Court ruling comes at a time when the Indian telecommunication companies have entered into outsourcing contract with leading Indian and foreign IT service providers such as Wipro, IBM and BPO firms such as Firstsource and Aegis. The telecommunication firms that have entered into multi million agreements include Uninor, Videocon and Idea.

Leading IT service vendor in India, Wipro had entered into an outsourcing agreement with Uninor in 2009 which is worth USD 600 million. Tech Mahindra has entered into a similar agreement with Etisalat, where the agreement is worth USD 500 million. IBM, a multinational IT service provider has signed a contract worth USD 200 million with Videocon. IBM has also signed IT outsourcing deal with another major telecommunication player, Idea.

Tech Mahindra says that they are closely observing the development and it is too early to make any comments on this issue. They have bagged contracts from Etisalat and Sistema Shyam and have put up a team of 500 professionals to handle the work of Etisalat.

The Supreme Court ruling will have an adverse effect on the service providers and suppliers, says Kamlesh Bhatia from Gartner. He says that the only means for the IT service providers to alleviate a huge impact is if they have included provisions to consider market risk. Still the companies will be affected as most of the contracts were entered during 2009-2010, while the telecommunication market was more mature. Majority of the deals are developed as partnerships with revenue bases milestones achieved by the telecom companies. Many of them would even include provisions for instances such as winding up of the company. In some case the IT service provider also have demanded for upfront capital investment from the telecom companies, which might safeguard the vendors to certain extent. Still there will be significant impact.

Firstsource, a Business Process Outsourcing firm says that they provide services to some of the telecom companies in India and the circle s they operate on have not been affected by the ruling of the Supreme Court. The company source says that there is only one circle where one of their clients has been affected and that will have only nominal impact on them.

Jaideep Ghosh from KPMG says that both telecom companies and the service providers will be badly affected, except for very few deals. If the impact has to be minimized, the conditions have to change in favor of the both within two to four months. Another service provider Aegis says that the impact of the ruling will be nominal as far as they are concerned.

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