Lehman effect: Outsourcing deals in limbo

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Mumbai, Sep 16: Bank of America’s takeover of Merrill Lynch has cast a pall of uncertainty over the latter’s outsourcing deals with TCS and Satyam, according to industry sources. Insiders say that Merill Lynch was a significant client for the two IT firms, and it will now be a “wait and watch” situation for the IT companies. An investment banker said that now it will be Bank of America’s call, depending on the kind of relationship it shares with the company.

Considering the economies of scale, it is known that Merill Lynch had given its IT projects to at least 25 large and mid sized IT firms in India and there is a huge possibility that the same vendors could be doing similar job for both the firms. An investment banker adds that the impact of Bank of America taking over Merill Lynch might not be much as the former would eventually have a large IT budget.

However, it’s a concern when it comes to Lehman Brothers. Another investment banker said, “Merrill Lynch, Bank of America and Lehman Brothers together had an IT budget of at least $1billion and if Lehman goes out, one can see the impact directly on the large IT firms.” Also, American International Group (AIG), who is expected to be the next hit, is a major client for large IT firms including Infosys, say insiders.

Analysts feel it’s early to say what steps Indian IT companies will take further as they have already been concentrating on other geographies since the last few quarters. Mohit Thukral, senior vice-president and business leader, Genpact, said, “It’s quite early for us to say what the next initiative will be, but there have been many acquisitions and that doesn’t make much of a difference to a vendor.” Gaurav Dua, head of research at Sharekhan, said, “An immediate impact could be screening out of non-performing employees and slow hiring by the Indian IT companies.”

Meanwhile, the Lehman Brothers shut down is expected to impact its direct employees in various large IT firms as well as third party employees in mid-sized firms. Lehman, which had the largest offshore setup in India, is supposed to have already handed over termination letters to almost 1,500-2000 employees.

Our Delhi bureau adds:

Infosys Technologies, the second-largest software exporter said that it does not have ‘any material exposure to Lehman Brothers”.