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September 2008 Quick Hits - News, Trends, Analysis

When Outsourcing Fails
Living and commuting in London, I feel the pain when outsourcing fails and my Oyster card no longer works. During July it actually impacted me twice as my Oystercard couldn't be read and the system broke down. I have been a keen user of the Oyster card since it was introduced in 2003, there are now more than 6 million cards and 38 million journeys made each week using Oyster as advertised on the tube. It is much more convenient than carrying coins around. But recently I read that TFL is cancelling their 10 year agreement with Transys (the provider for maintaining and running Oyster cards). They mentioned they were looking for additional services at a lower cost. This action supports many previous articles we have written about a single supplier. In previous newsletters we have commented that clients relying on a single provider often experience uncompetitive prices and are not satisfied with the level of service years down the contract. I think it's great that TFL has finally decided to go out and look at the market place to investigate what is available in terms of price and quality in the prevailing market conditions.

Indian Offshorinig Still Going Strong
We have all been reading the mad headlines that Indian tier 1 vendors are growing at 30-40% per year whereas the traditional big four are operating at 5 to 10%. However, it's not a fair comparison because they are operating at different stages of maturity. When you have a turnover of $30BN it is more difficult to grow by 30% than if you have revenue of $3BN, so I think its important to add a pinch of salt to all the news stories flying around, and I would even go to make the bold prediction that 5 years from now, the big Indian players will also have much lower growth rates as it becomes nearly impossible to maintain such aggressive growth in a saturated market. However, with the capital markets' current meltdown, the credit crunch will most likely entice more CIO's down the offshoring path, and thus, offshore providers should have little trouble maintaining healthy growth rates.

A Bigger Player In Town
So finally, Big Blue has a true competitor of its own size. For several years, IBM have often been ahead of the competition when it comes to offering global IT professional services, but now with the completion of the HP and EDS merger, a new threat has arrived on the scene. The $13.9BN acquisition of EDS is the biggest acquisition by HP since they bought Compaq computers for $20BN in 2000. There will be some headcount synergies, but the strategic reason for the acquisition was to expand its business in the lucrative field of technology consulting and outsourcing services. Will IBM executives fear that the new giant on the block will begin to erode market share? Perhaps, but we should remember the combined turnover of HP/EDS $38BN versus $54BN for IBM - roughly 50% larger. In the short term the EDS clients might feel a drop in the level of service as the two giants integrate. However, from 2010 onwards, they will reap the economies of scale from a truly global delivery model.

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