IT Outsourcing: Many Mergers Ahead

Xerox’s $6.4 billion bid for business process outsourcer Affiliated Computer Services (ACS) is the second merger announced between an enterprise hardware maker and a technology services provider in a week. Just seven days earlier, Dell went public with its plans to purchase Perot Systems.

The Xerox-ACS deal appears to conclude a troubled chapter in ACS’s history: The company had been unofficially on the block for several years, during which time it saw a few failed buy-out attempts. It should also mark an end to the pair-ups between computer makers and services providers, now that HP, Dell and IBM are all in the outsourcing business. But other tech equipment makers, such as Cisco or EMC, may be eyeing IT service providers for their recurring revenue sources, says AMR Research Director Phil Fersht. He thinks telecom network providers like Verizon or AT&T may also see some value in snapping up IT services business.

Even more likely—and more imminent—are match-ups within the IT outsourcing space. The ongoing industry consolidation is putting the squeeze on mid-size IT service providers. “They either need to get bigger,” says Gartner Research Vice President Dane Anderson, “or they need to become even more specialized.”

Pricing wars between offshore vendors and U.S. and European-based providers will also likely accelerate merger and acquisition activity. “I expect offshore-centric providers to acquire clients,” says Fersht, “while the Western incumbent providers will buy each other.”

Among those likely to enter the M&A fray are CSC, CGI, Unisys, Capgemini and Atos Origin, says Peter Bendor-Samuel, CEO of outsourcing advisory Everest Group.

In addition, says Fersht, pure-play BPO providers—such as Genpact, WNS and EXL—may seek synergies with IT service providers in the next year.

Who will be next and what size the deal will be is anyone’s guess, says Anderson. Barring big global conglomerates like IBM and HP, any provider could find itself at the table being acquired, he says.

Those IT service suppliers who hope to successfully compete for business with both the outsourcing behemoths and offshore-centric providers must steer clear of IT services where the only differentiator is price, such as ERP development and services.

“The new value is being able to align development skills with real business needs to empower clients to prosper,” says Fersht. “Those providers with the courage to move into outcome-based client engagements will stand a stronger chance.”