BP deal precursor to other big outsourcing contracts

The recent $1.5 billion outsourcing deal by UK-based oil major BP reconfirms that outsourcing will continue to grow, say analysts.

While there will be many such deals in the next two to three years, analysts also believe all such deals with be cornered primarily by major players, rather than the smaller ones, leading to vendor consolidation.

Avinash Vashistha, Chairman and CEO of Tholons, belives that consolidation will be a crucial theme among Fortune 100 and 500 firms. “At least one-third of the Fortune 500 firms and 70 per cent of Fortune 100 firms are looking for vendor consolidation,” he adds. The reason is simple. Most of these firms have their IT work distributed among 30-40 vendors.

Five years earlier, many of the larger players did not have some of the niche capabilities, which was provided by smaller players. But with all the major IT firms getting into end-to-end offerings, it calls for vendor consolidation.

The BP deal is a case in point. The vendor consolidation from 40 to five will help save the firm $500 million (around Rs 2,490 crore).

BP, according to a CLSA Asia Pacific Market report, will generate 30-35 per cent cost savings after this consolidation exercise over a five-year period.

The report adds that most vendors have given cut their rate card by 7.5-15 per cent and have guaranteed an additional 10-15 per cent savings through offshore leverage and change in manpower profile.

BP is apparently targeting a higher percentage of offshoring.

While BP took close to 12-months to consolidate its vendors, it has also worked on innovative terms and condition. For instance, billing once in three months and onsite rates only for local employees, but this could not be confirmed.

“BP has been one of the earliest proponent of outsourcing. They already outsource over 2,000 jobs to India. Before the vendor consolidation, the company had plans to increase its outsourcing pie by 15-20 per cent. That would mean volumes going up for IT services players. But BP is known for bargaining a good price for itself,” said an analyst.

“I don’t know the details of the contract. But if the price cut is on the rate card, then it’s not much of a cut, as the actual price on rate cards have not come down. It also means that for the first year, pricing will go down by that much percentage,” notes Vashistha.

In sum, conclude analysts, the deal is a significant win for IT players at a time when large deals have slowed considerably especially from the UK and European region.