On Lehman, Merrill, and Outsourcing
News on Lehman Brother’s bankruptcy and Merrill Lynch being bought by Bank of America (BofA) has sparked uncertainty over the future of the companies’ outsourcing providers.
Merrill Lynch made a number of outsourcing deals with Tata Consultancy Services (TCS) and Satyam. Merrill was a significant client for the two firms, now TCS and Satyam waits and evaluates the situation. With Bank of America’s Merrill takeover, it will now be BofA’s decision if it will continue or stop Merrill Lynch’s IT projects to at least 25 large and mid-sized IT firms in India. Merrill’s IT systems and IT specialists could prove to be a strategic buy for BofA. “Merrill Lynch has a global infrastructure that will allow Bank of America to build its business outside the US”, says industry observers.
Merrill has an estimated 2,500 third-party employees at TCS and Satyam. BofA buying Merrill Lynch means the US bank would eventually have a large budget for IT spending, this means Merrill’s captive BPOs would not be as affected as Lehman’s IT outsourcing providers. According to Robert Morgan, director at supplier outsourcing consultancy Hamilton Bailey, “Bank of America will want to integrate as many systems into its own infrastructure as soon as possible but it will be acquiring some major IT systems that it does not currently offer in its financial services portfolio, so conventional IT will be assimilated and jobs lost, but for specialist IT services it will need to retain the staff.”
Merrill Lynch and Bank of America have a combined IT budget of at least $1 billion, while Lehman Brothers case is an entirely different scenario. Lehman has the largest offshore setup in India, so if Lehman sinks its IT outsourcing providers would be greatly affected. Lehman third-party employees are estimated at around 1,500 to 2,000, and the bank has made outsourcing deals with Wipro and TCS. Despite Lehman’s bankruptcy Wipro is not worried and said the bank is not a relevant client, while TCS thinks they will not suffer much of an impact.
US analysts believe it is still too early to say what steps Indian IT companies will take, as these IT firms have already been concentrating on other geographies in the last few quarters. Naresh Pachisia, managing director of Kolkata-based SKP Securities Ltd., believes Lehman’s bankruptcy and Merrill’s takeover has little impact to India. “The markets may fall a little more but should begin to recover once the Indian festive season kicks in”, says Pachisia.
In an interview with Mark Kobayashi-Hillary, Ovum analyst Samad Monsod argues that despite the financial services mayhem people should know that not all financial services are suffering. In fact, “Companies like Capgemini and Accenture are reporting growth in financial services projects, particularly where their consultants can advise on reducing cost”, says Monsod.
Lehman’s bankruptcy and Merrill’s buyout may dent the companies’ outsourcing providers’ revenue, but outsourcing firms as well as analysts and industry experts all seem to agree that the US financial services turmoil will not greatly affect the outsourcing industry.
Tags: Lehman Brothers