EDS Learns From IBM, Accenture. Goes The Oracle Way

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EDS Learns From IBM, Accenture. Goes The Oracle Way

George P. Alexander Jr. (Software Engineer) posted 4/11/2006 | Comments (5)

Have you noticed that the offshore business model is gradually changing over the last few years, especially in India with big players acquiring smaller offshore based companies? A recent piece of news got me thinking in more than one way. Texas based IT Services giant Electronic Data Systems Cooperation (EDS) recently offered to buy a 52% stake in Mphasis BFL Ltd, an Indian IT Services and BPO solutions firm for around $380 million. Both sides look at this as a win-win situation.
What are the implications? Do other big global players have their sights on smaller but firmly established Indian companies? Or can it also be the other way round with Indian companies buying smaller foreign based firms to widen their reach and scope and get aggresive with their own set of aquisitions? Does this present a new paradigm in the offshore buisness model or is it an already existing one that is showing more momentum now? And why should developers care anyway? Let's take a look at how exactly market dynamics come to play here and what the future looks like after the acquisition for both companies.
Mirrors Oracles acquisition of i-flex solutions
The EDS offer mirrors last year's major buisness headline in the Indian IT areana, when Oracle bought majority stake in i-flex solutions and generated big news. i-flex solutions, another Indian based IT Services solutions provider primarily focused in the banking domain had a majority of its stake for $593 million bought over by Oracle. From Oracle's vantage point, this perfects another avenue to reap revenues from a rewarding domain that it already seems to have a strong presence in: Banking. Not that Oracle does not already have a strong client base when it comes to banking solutions, but that they probably wanted to totally dominate or expand their existing leverage in this particular domain and use the expertise that i-flex has gained through its product flexicube which is based on the Oracle database. Another strong reason is that the Indian banking arena is huge. Massive. And there is so much potential to gain revenue in this market. Some of the biggest banks in India use i-flex solution services to manage and run their software services. This is the only justification that I can find when an organization as massive as Oracle that already has its services and products extensively used by financial institutions and banks all over the globe, buys a much smaller but popular IT banking solutions provider that exists offshore. Offshore expansion without the hassles? I'll make a wild guess and would really think not so when it comes to Oracle since they probably have an eye on the Indian banking sector. But the Indian market apart, do you know that i-flex solutions' flexicube software has been the top selling banking product for the past four years? The acquistion also compliments its heated competition with SAP which leads in the enterprise level ERP solutions.
From an i-flex solutions perspective; with over 5500 employees, this benefits the company not only in terms of image branding, but also with respect to extending their existing portfolio of clients and services and using the Oracle leverage to push their products and enhance their presence in the global market. Keep in mind that i-flex had the disadvantage of being an offshoot of Citigroup. This was bad because other major bankers that work in global locations, simply will not completly trust a firm that was under a rival global bank to run its software services and support. Hence, from what I heard from from an Oracle insider, i-flex directors were more than content when they realized that they would distance themselves with Citibank and stand to gain an enhanced portfolio of customers in the banking area through the link up.
Now the EDS offer to buy majority stake in India's 7th largest IT Services firm with more than 12,000 employees seems not only to take a cue from Oracles strategy but goes an extra step by also learning from its arch rival and number one IT Services provider IBM and its other competitor - the IT Services monolith Accenture. The moral of the story being that Outsourcing is here to stay and better catch the bus now than never.
IBM and Accenture's strong off-shore presence
IBM and Accenture leveraged the off-shoring business model a long time ago. Now IBM has around 40,000 employees in India while Accenture has around 17,300 employees. At this very moment, both are still expanding. Accenture has one of its three Bangalore offices right next to my office. And apart from their already existing 6+ storey building which is around a hundred meters in length, they are constructing another facility connected to the existing one to double the buildings size to house around 9000 employees totally. Both firms and other majors like HP and DELL and Indian companies such as Infosys and Wipro are on a blitzkrieg hiring spree and expansion project even if that means over blowing bench size to abnormal levels with high expectations from contracts on the pipe-line. In short, the bench mark pointer pretty much summarizes what's expected for IT on the Indian scene for the year 2006: Lots of jobs and plenty of projects that are on the anvil. What they don't tell you is that if you're some where in mid-career level, there is a big chance that you'll start up on bench for a few months unless they specifically tell you that they need your urgently for a project.
Coming back to our EDS correlation to the offshore business model changing dynamics, it will be interesting to know that IBM made its first Indian buyout in 2004 by acquiring Indian based BPO firm Daksh to ramp up its BPO and call-center services in India. It sounded pretty weird to have the biggest global IT firm, with its existing presence in India (at the time with around 9000 employees), not starting its infrastrucure from scratch and setting up its own facilities. The major puller was that IBM was already Daksh's biggest customer and IBM was more than satisfied with the way Daksh did business. Hence, the buyout option looked favorable - not only to IBM, but also to small-time Daksh. Once again - so many factors for setting up a center in India are avoided in a process of due diligence and evaluation which would, in reality take a minimum 6 months to do.
This strategy has usually been a winning formula for foreign companies that want to take advantage from already established and globally recognized companies, their infrastructure, avoiding the setup hassles and benefit from fruits of an already offshore platform. Many companies have recently started flourishing using this model. Even global leader Flextronics went for the option of buying out Indian based Hughes Systems though it presently has a massive plan to expand rapidly this year in the country. So now you get a gist of where I'm getting at: all the biggies setup a part of the Indian operations by not only setting up their own operations and infrastructure, but by also acquiring existing Indian ones and integrating both to compliment their business model.
Now coming back to the EDS equation with IBM and Accenture, EDS made the mistake of not being the early bird and was pretty slow when it came to fully exploiting the benefits of outsourcing and establishing development and support facilities offshore (though it did in other countries, it lacked a strong presence in India). Presently EDS has only around 3000 employees working in India. It was very slow to expand compared to rivals IBM and Accenture. Analysts believe that the only way that EDS can offer stiffer competition with arch-rival IBM is to boost its off-shore head count from 12% to something significantly more.
The EDS offer, IBM and Accenture
So does the recent offer to buy a 52% stake in Mphasis BFL Ltd relate to its competition with IBM and Accenture?
Offcourse it does!
By purchasing a 52% stake in Mphasis BFL Ltd, EDS automatically does the ramp up by increasing its offshore head-count from 12% to 19%. Hence, the purchase directly allows EDS to exploit lower labor costs that increase revenue from clients. Mphasis specializes in an array of services that range from software development, process transactions and call-center services with global fortune 500 clients. It was ranked in 2004 as one of the forbe's best under billion dollar companies. I think the last nail in the coffin when it came to expansion of EDS offshore facilities came when it got its biggest loss this year by loosing close to a third of its GM outsourcing business from an existing contract. This loss was short lived though, when it secured contracts which total to around $3.8 billion over five years. But yet, EDS did learn an important lesson: Offshoring is the only way it can offer a stiffer competition to its mortal rival IBM and its other competitor Accenture. Setting up an offshore center is definitely possible but not without a host of hiccups which would delay operational facilities to atleast a few years. That is where the Oracle route comes in. Instead of starting from scratch, EDS was quietly evaluating since last year the potential of buying Baring's 32% stake in Mphasis along with an existing 20 percent. The offer was speculated ever since the start of the year but only became a 100% certainty last week.
What EDS stands to gain by teaming with Mphasis
So by enhancing its off-shore presence by buying up an already established and globally recognized IT Services firm, EDS hopes to gain large capacity mainly in the BPO and support sector and be as cost effective as possible. This it will achieve by utilizing Mphasis's already existing, successful and heavy BPO services while from its lesser dominating IT Services side, EDS will ramp up its financial services practice to compete with IBM as Mphasis possess a strong background in financial services.
The Good and Bad For Mphasis
Some Indian analysts have felt that this is probably good as this acquisition acknowledges that mid-size IT companies like Mphasis and i-flex have gained significant global recognition and provide the Indian companies an enhanced portfolio of customers and services along with the benefits of mutually developing synergies of existing practices and workflows. The other aspect would be more financial support and marketting muscle. Mphasis CEO Jerry Rao has stated that the Mphasis board will still control all internal work-flows, management, structure, operations and the company name will stick on as it has an established brand image while being a publicly listed company. The company hopes to use its relationship with EDS to boost its portfolio and turn this tier-2 Indian company into a tier-1 Indian company that has potential to make a global footprint. How much of this will stick on I don't know. But I guess that we will see all the implications in proper light only in the new financial year 2007. Indian analysts however feel that the biggest disappoint is that of the possibility of such mid-size companies making it big on their own are now stunted as they have been taken over by the bigger boys.
It was last year when Jerry Rao, CEO of Mphasis had announced at the end of the third quarter that the board of directors intended to bring up Mphasis to a billion dollar company by 2010 by making forays into emerging markets and diversifying their practice sectors by utilizing existing customers to leverage more contracts. Infact, if you have a quick glance at Mphasis previous three year history, you won't miss that the company was on aggressive path by buying up firms - In the latter part of 2002, they made their first acquisition of Chineese based software development firm Navion to get a chunk of chineese buisness. This was followed in 2004 by its next purchase of Bangalore based Kshema technologies for $21 million which specializes in embedded technologies (as Mphasis did not have a strong competency in this domain), a US based health care and services firm - Eldorado for $16.5 million (to make forays into the healthcare sector in the US) and for $14 million, it also ventured into consulting - the next big thing for Indian IT companies after outsourcing by buying UK based Princeton consulting intending to specifically focus on customer management solutions.
Not surprisingly, a quick look at recent purchases among other Indian based IT companies' show that they are truly willing to take on the global players and level the playing field. Big players such as TCS, Infosys and Wipro have made a string of acquisitions of foreign based firms.
Recently, Indian IT Services giant Wipro looked a little notorious and aggresive with its portfolio of purchases that kept popping up in newspapers every now and then. Its first purchase was way back in 2003 when it bought NerveWire for US $19-million and an IT consulting service company that specializes in Financial services.
But after around 2 years, came a slew of purchases that kept analysts speculating as to intentions. In December 2005, the IT Services giant bought Austria's NewLogic for US $56-million to further it RnD service business (a hither-to untapped market with potential in the billions) followed by an immediate purchase that bought US based mPower Inc for US $28-million which provides consulting for financial software services and technology. This was followed in Feb 21st this year when it bought cMango for US $20-million, another US based consulting company with around 120 people that assists businesses streamline and improve service operations by providing Business Service Management consulting.
Between September and December, TCS, India's largest outsourcing company acquired Australian based Financial Network Services a banking solutions vendor for $26-million in Oct 2005, and Chile based BPO Comicrom for $23 million. This is a limited list just to name a few. The point being that as Thomas Friedman put it after getting a bulb up his head from Infosys CEO Nandhan Nilekani, that the world is flat - or atleast, on the way to becoming flat. Just wondering what are the other ways the playing field will be leveled. What about emerging off-shore destinations in the far east, Russia or even South America? Will there be a saturation point when both planes (western markets and off-cheaper offshore destinations) inch closer to each other? I get this picture of a water fall whenever I think of outsourcing - the water fall will keep running until 1. the source of water stops or 2. when the lower plane rises and there is nothing left to call it a water fall. So the waterfall might dry up when we have the next IT meltdown or a 911. The lower plane will rise when offshore destination parameters in terms of cost rises. Other parameters include quality, time, management etc and matter when you consider destinations or individual companies. But yet, the key factor will always be cost when it comes to the question of considering outsourcing.
Sounds cool - when you look at how these firms are evolving and how IT service dynamics change. I wonder what goes through the mind of a developer when such aquisitions occur. I guess developers in the "buyee" company get the benifit when project requirements trickle down to them from their bigger buyer's portfolio of clients. There might be more support coming in too. Another way of looking at it would be that of branding. You stand a chance to get clubbed with a globally recognized giant. Is there anything else I'm missing? What about senior management? I know that there are certain top management executives that fear that they'll eventually get chucked out and replaced by the buyer's management and simply resign and jump over to other bigger firms with equally relavent ro bigger profiles. I'm still waiting to see the fireworks for this acquisition though.
Do you follow outsourcing trends and developments? What do you think companies such as Mphasis and i-Gate solutions stand to gain or loose when bought over by global giants? What are the advantages and disadvantages of such acquisitions with respect to both firms? I would love to hear second opinions, analysis and gut-feelings as business paradigms are my third line of work-interest.

Disclaimer: The views expressed in this blog are the author's personal views and in no way reflects the views of his employer or anyone else. Any opinions, tips, ideas, work arounds, fixes or other commentary expressed in this blog is provided "AS IS" without any warranties and rights.

EDS Learns From IBM, Accenture. Goes The Oracle Way