Q: Does the reported offer and pending sale of CSC and ACS indicate any trends?

(Readers note: A group led by Texas Pacific Group has been reported to be in negotiations to acquire ACS. Industry sources indicate that the deal could close quickly pending usual approvals. The Wall Street Journal reported this past week that HP and Blackstone were interested in acquiring CSC.)

BT: The reports we are all seeing may mark a watershed trend in the maturity of the outsourcing - and to a greater extent the professional services - industry and an inflection point on the end of the currently en vogue, arms length RFI/RFP process.

Each of these providers are brand names in their own right with strong customer bases and real strengths that can be leveraged, and private equity firms such as Texas Pacific Group and Blackstone are known to be savvy buyers. The fact that two of the outsourcing industry's major players are apparently under consideration could be the tip of the iceberg. Clearly this marks a consolidation (or efficiency / optimization) trend on the provider side that could change the game and allow providers to opt out of participating in sub-optimized, consultant-led commodity procurement process structures.

Q: How does this impact the buyers of Outsourced Services?

BT: CSC becoming a part of HP clearly reduces buyers' options for some service groupings and might enable the sell side to attempt to raise their price point. Additionally, the Indian-based providers such as TCS, Infosys, Wipro and WNS could use this as a further opportunity to move up market in acquiring a greater number of projects that require more complex client management skills. Overall, clients will have a new range of engagement opportunities, but with a morphed provider set.

Q: Does the current process used to buy outsourcing services impact the market creating this opportunity?

BT: Great question. It is always easy to look at a problem and treat the symptoms rather than the underlying problem itself. Pure commodity process procurements are not helpful to providers in establishing contracts that leverage their core capabilities and obtain reasonably profitable business that will meet their own shareholder requirements. The more viciously the process is executed the more the solution required by the client and the provider struggle. Simply put - the process is broken.

The current prevailing process is adversarial and requires rote responses from providers for prescriptive solutions that severely limit the value acquisition that clients are seeking. Unfortunately, the buyer market's reaction to receiving sub-optimal solutions from providers has by and large been to try to squeeze the providers even further on price by employing outsourcing advisors practiced at writing highly structured RFPs and employing arms-length negotiation practices. The combination of the two is toxic and is killing provider margins (and viability); thus leaving them open to acquisition and/or consolidation.

While the short-term effect of such practices initially favored the buyer market, we have reached the point (as evidenced by the increasing number of failed deals) where the net result is the sub-optimization of the clients' real goals. Reversing these effects (and thus curing the underlying problem) requires a fundamental change in the outsourcing procurement process whereby buyer, outsourcing advisor, and provider(s) participate jointly in an open and collaborative manner to achieve the best solution possible at a mutually beneficial price. It will be interesting to see how 2006 progresses and the impact of the Private equity trend on other leading firms such as Accenture, Capgemini, EDS and Perot Systems.