Outsourcing Clients More Carefully Weighing Risk And Rewards

Satyam's financial fraud mess is undoubtedly supplying an extra dash of drama to the Indian IT outsourcing marketplace lately. However, the economy is still the dominant factor fueling change in what clients expect these days from their IT services providers, says an Infosys executive.Infosys hasn't been actively pursuing Satyam clients, but clients that do business with both companies have been asking Infosys questions about moving work, says Ashok Vemuri, an Infosys senior VP and head of the company's banking and capital markets group, and member of Infosys' executive council.

That said, there isn't a lot of overlap in clients between the two companies, and for the most part, Infosys clients who also work with Satyam are staying put for now, at least until they learn more about Satyam's likely fate. "It's not very simple to shift vendors," said Vemuri in an interview with InformationWeek.

What is shifting is the array of demands from clients, says Vemuri. In the wake of Satyam's crisis, Vemuri predicts clients will be asking more questions of vendors in their due diligence selecting partners. But in the bigger picture, as macroeconomic conditions have worsened globally, Infosys already is seeing changes in the kinds of services clients want, and also in clients' expectations about performance, quality, and timeliness, especially from customers in the financial services sector.

Clients are expecting Infosys to "have more skin in the game," he says. Clients are seeking risk/reward provisions in the contracts they sign with Infosys, which is something that never came up in the past, he says.

While the economy is a big driver in that change, so, too, is Infosys' own evolution -- winning confidence from clients that Infosys is up to the challenge of providing services "higher up on the value chain," he says. So, Infosys clients are starting to include in their contracts more stringent requirements about delivery, security, availability, and other issues, Vemuri says. "It's not enough to say we can deliver on time, and good quality," he says. "We're sharing in the risk and reward, and pricing models are changing, to an extent."

The sort of new work that Infosys is booking lately includes "more strategic and long-term projects," such as systems work that interfaces "with our clients' clients," and projects "more on the revenue-generating side, not just the cost side," he says. "The tolerance for error is low."

While these trends have been in play over the last six to nine months, "they've been picking up in speed in the last three months," he says.

Meanwhile, as the financial services sector deals with its turmoil, Infosys is seeing "significant opportunities" coming up, especially in work related to post-merger and acquisitions, risk management, wealth management, analysis, and compliance.

Infosys also is seeing changes in how outsourced work is being distributed by clients, he says.

While IT budgets are going down at many companies, a higher percentage of those IT dollars are being spent on offshoring, he says. And it's not just more dollars as a percentage of IT budgets being spent on offshoring, it's the volume of work that's going offshore that's growing, too, he says.

In the past, for every $100 spent by an average Infosys client, about 70% of the work would take place offshore while 30% was on-site at the client's location. Now, the percentage of work and the dollars spent offshore has shifted to about 80% to 85%, with only about 15% to 20% of the IT spending related to on-site work at the client's facility, he says.

Meanwhile, the sales cycle in booking new work with clients is taking longer, Vemuri says. In the past, VPs often signed off on deals, but now more clients have to get the final OK from "the C-level suite," he says. In the financial services sector, upheaval in executive ranks also is slowing down the process of getting contracts in finalized.

Finally, while Infosys clients are taking longer to sign new deals, apparently at least one Satyam customer -- U.S.-based insurer State Farm -- has moved quickly to sever its ties to the troubled firm.

A State Farm spokesman said the insurance company had been using Satyam services for several years for multiple projects that have "a start and finish." The work provided by Satyam ranged from computer "programming for claims" to managing projects, he says. The spokesman wouldn't confirm a specific Satyam headcount, however, reportedly about 400 Satyam employees worked for State Farm.

Some Satyam's employees are still finishing up work at State Farm in the next few weeks, and many of those Satyam people were located in State Farm's main offices in Bloomington, Ill.

State Farm is transitioning the work performed by Satyam to other IT vendors. "We've always used several IT vendors," says the spokesman.

While State Farm was pleased with the work provided by Satyam employees, "there's too much uncertainty, we're concerned about the company's future," the spokesman says about the reason State Farm ended its relationship with Satyam. It was safer for State Farm to move the work to other vendors than risk the unknown fate of Satyam.

Whether it's building new risk/reward provisions into IT services contracts, or ending outsourcing relationships with dicey providers, it seems as though risk management will be top of mind for many offshoring clients moving forward.

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