Are Rival Partnerships the Future of IT Outsourcing?

HCL and CSC, companies that have often competed for customers, have teamed to focus on legacy application modernization and cloud hosting. Could partnerships formed by rivals prove more valuable than mega-acquisitions as IT outsourcing providers respond to changing market dynamics?

Last week, HCL Technologies and CSC announced a new partnership in the application modernization space, targeting corporate IT customers who want to move their legacy applications to the cloud.

The move was a surprise to some IT outsourcing industry watchers since $4.8 billion dollar HCL had long pitched itself as a cost-effective alternative to the likes of the $13.5 billion CSC. "These two companies have often gone head-to-head for major contracts," says Hansa Iyengar, sourcing and vendor management analyst with Forrester Research.

IT   outsourcing, IT outsourding partnerships
Credit: iStockphoto

But changing market dynamics have brought the two together. Together, the companies will first focus on the financial services industry, building a joint banking center of excellence with delivery centers in Bangalore and Chennai, India.

HCL Joins Forces With CSC to Deliver Value-based Low-Cost Services

Noida, India-based HCL, which has focused on infrastructure services, gets access to a larger customer base, CSC's BizCloud private cloud offering, and a stronger foothold in the applications space. Falls Church, Va.-based CSC will get a new channel for its cloud platform and access to cheaper resources offshore, the lack of which has long been a competitive disadvantage for the largely onshore-focused provider. And both companies will seemingly increase their opportunities to cross-sell their products and services.

"The data center game is headed for the lowest common denominator of commoditization. With players like Amazon in the game, it's all about the lowest cost for the most grunt. It'll be as common as selecting a provider of electricity soon," says Phil Fersht, president of outsourcing analyst firm HfS Research. "The only feasible way to find new thresholds of growth and value for providers in this space is to deliver value-based services combined with low-cost, reliable, and highly scalable computing availability."

CSC may have had little choice than to pursue this kind of partnership or risk going the way of other U.S.-centric providers like Unisys who have seen their revenues decline sharply in recent years. "While CSC has survived well on its annuity relationships in the healthcare, federal, and banking sectors, its management clearly realizes the writing will soon be on the wall if it can't diversify its business out of this predicament," says Fersht.

"All the asset-heavy players are hedging their bets and creating multiple options for clients as this disruption continues to work itself out across the landscape," says Eric Simonson, managing partner of research for Everest Group. "Some are using acquisitions, and all are using some form of partnership in the ecosystem because the breadth of capabilities is so extreme."

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