BPO clients seek upfront payments
16-Dec-2008
BANGALORE: When Tech Mahindra paid $100 million upfront as part of future savings to clinch a multi-year outsourcing contract from British Telecom (BT) earlier this year, it was seen as one of a kind deal. It was not
Many large IT outsourcing customers, particularly in the financial services and telecom sectors, are demanding hefty upfront savings payment from service providers to tide over the global slowdown and credit squeeze.
“One large insurance company, currently discussing a contract, demands over $100 million upfront payment as part of the savings promised by a vendor,” said a top executive of a leading tech firm who did not wish to be named. “We find more telecom companies discussing this as part of the deal currently,” he added.
At a time when many large enterprises are facing a credit crunch, it becomes imperative for outsourcing decision makers to demonstrate savings upfront to their managements. “Upfront payments will help us build a better business case for IT investments at a time when our company is facing demand and liquidity crunch,” said a senior IT executive of a large phone firm who requested anonymity.
This will greatly increase the cost of acquiring new businesses for service providers such as TCS, Infosys, Wipro and Tech Mahindra. “These demands will make it critical for service providers to seek different operating models, and will also put tremendous pressure on their internal systems to ensure enough savings,” the tech executive said.
But not everybody is offended. IT service providers such as Tech Mahindra, which counts BT as its top customer, see upfront savings payment as a small price to protect their ‘preferred vendor’ position.
“This is a strategic area in anchor tenant and I have taken a most preferred position, where I have kept my competition out,” said Tech Mahindra president, strategic initiatives, Sanjay Kalra during an analyst call few months ago. “On this deal my margins after amortising the upfront payment will be comparable to the rest of my business,” he added. |
