IT outsourcing contracts in limbo

The Outsource Blog reports.

The order comes at a time when both Indian and multinational IT firms like Wipro, Tech Mahindra and IBM, besides business process firms such as Firstsource, Intelenet and Aegis, have signed multimillion-dollar deals with telecoms firms including Uninor, Etisalat DB, Videocon and Idea.

For instance, Wipro had signed an estimated $500 million to $600 million outsourcing deal with Uninor in 2009. Similarly, Tech Mahindra had signed an outsourcing deal from Etisalat, with a revenue estimate of $400 million $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 was “closely monitoring” the development, Global Services says.

“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 at 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 telecoms vendor segment was much more mature. “Most of these contracts would be structured as partnerships with revenue related to the milestones achieved by the telecoms 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.