Hewlett-Packard Co has dismissed suggestions that JP Morgan’s decision to terminate its outsourcing contract with IBM Global Services last month signifies an end to the era of mega-outsourcing contracts.
However, Carlo Magistrelli, head of HP’s European outsourcing business acknowledged that JP Morgan’s move is symptomatic of clients choosing to work with a number of suppliers rather than a single outsourcer.
He said: There are more large outsourcing deals to be signed in the future, but we are seeing a move towards clients looking to work with a number of specialized suppliers to get a better deal and a better price.
Magistrelli gave the example of HP’s $1 billion outsourcing deal with Ericsson as an example of a client that has divided its outsourcing spend between a number of suppliers. He said: We are managing the infrastructure but IBM is managing the client’s applications [in a separate deal].
HP said it sees no sign of weakness in its outsourcing pipeline heading into the final calendar quarter of 2004. Last month, the company announced a $500 million contract with Nokia to manage its IT infrastructure over the next five years.
Magistrelli said: Market analysts say that there is a slowdown in the market, and that last year was higher than usual because of the NHS and Inland Revenue contracts in the UK. However, the banking sector will be the rising star of the outsourcing sector in coming years and there are some big opportunities with mobile operators.
Magistrelli downplayed the importance of offshore delivery in growing the company’s outsourcing business. HP utilizes low-cost offshore centers in countries such as India to lower the cost of delivering IT services projects to western clients, but Magistrelli believes that it is not where the outsourcing market is being lost and won.
He said: Only 15% of the total cost of an outsourcing project can be reduced by offshore delivery. If you take 30% out of that area, it is not a great cost saving in total. The real battle in outsourcing is how vendors can reduce cost through tools and methodologies such as adaptive enterprise. It is a technology battle between ourselves and IBM.
Magistrelli said he remains optimistic about the prospects of growing HP’s business process outsourcing business, despite its failure to build on its initial landmark deal with Procter & Gamble announced last year.