[September 01, 2009] Slump-hit companies switch to less-is-more policy with vendors [The Economic Times, India] (Economic Times (India) Via Acquire Media NewsEdge) Aug. 29--NEW DELHI -- In good times, companies tend put on flab, despite spiel about a hawk eye on overheads and offshoring to cut costs. In bad times the flab looks more like a hydra-headed monster, to be decimated to a manageable size and to cut costs. And this driving companies to consolidate their technology services providers. Early this week, British Petroleum reduced its number of vendors from 40 to five, a move that will help save the company $500 million. Across industry, notably among the large global companies, this trend will accelerate. According to consultants and analysts, companies like Applied Materials, Best Buy, Cardinal Health, Home Depot, Verizon, Chevron and several others which have 40 to over 100 vendors, are in consolidation mode. According to one analyst, almost 60 percent of the Fortune 100 will prune their technology vendor list. This has been triggered by a desire to get economies of scale, get into more strategic relationships with fewer vendors, get better pricing by increasing volume of work to limited number of technology suppliers and reduce governance overhead. Gartner India research director Partha Iyengar says, "The next 12 months will see a fair number of deals triggered by vendor consolidation. Large vendors will gain, small will lose." In a similar vein, Wipro Technologies chief strategy officer Lakshminarayana adds, "Customers are looking to reset cost structures. Reducing number of vendors helps do just that." That's what global majors are working on. Ron Kifer, group vice president and CIO, Applied Materials, a $9-billion US company, said they have identified opportunities for vendor consolidation in data centre co-location and telecom services. Its large vendors include IBM, TCS and Wipro. Another large Fortune 500 bank is evaluating options to reduce its infrastructure management and data centre partners from 10 to two. One of the world's top five retailers, which has business software from SAP, multiple data mining tools and multiple vendors supporting supply chain, finance and other operations, is looking at reducing its technology vendors from around 80 to 25-30. A person in the know of the development shared this with ET but declined to offer details. Another Fortune 50 pharma player, which has about 100 vendors doing tasks like data mining, drug distribution and supply chain management, wants to its reduce vendor list by at least 60 percent from around 100. Such moves spell big gains for large Indian IT services players even as they help global companies cope better with the slowdown. TCS, the largest services company which was among the five selected for the $1.5-billion BP contract, says it is in discussion for at least three-four such deals in which the customer wants to consolidate vendors. TCS CEO S Ramadorai said, "These are Fortune 500 companies in retail and banking & financial services space. In the current market environment, it is an attractive strategy." Customers can save 12-15 percent of their costs by reducing the number of vendors. Chandramouli CS, director -advisory services, Zinnov Management Consulting, a technology consulting firm, explains that a $10-billion-plus company will have multiple vendors at offshore, onshore and near shore locations. As the number of vendors increase, compliance and management is a huge task and costs escalate. "Restructuring initiatives like vendor consolidation makes them more agile," says Chandramouli. Besides, too many relationships reduce buying power and increases risks. In such times of slowdown, it can be your Achilles Heel. "Consolidating vendors can impact both-reduce risk and increase buying power," says Sid Pai, managing partner, TPI, a global sourcing advisory firm. For instance, in the banking sector, under compliance regulations (by US Federal Financial Institutions Examinations Council), a company has to ensure that there won't be any data theft, even if the customer data is managed remotely-for instance US customer information being managed out of India. Reducing the number of vendors enables a company to ensure reduced risks, better compliance and reduced overheads. Similarly, for companies engaged in healthcare, while records may be accessed by vendors around the world, having a handful of vendors makes it easier for companies to manage relationships and tackle leakages, if any, in the system promptly. Companies doing R&D remotely also try to limit the number of third party vendors to protect intellectual property and any infringements of patents. For instance, Microsoft which files for a few hundred patents every year, just has one global vendor, CPA Global, to do the patent filing. "Clients who think they have too many vendors are consolidating. It helps to reduce risks and manage costs better," adds Infosys Technologies CFO V Balakrishnan. Adds Mr Kifer of Applied Materials, "Having fewer vendors helps drive more consistent processes and service across the organisation and simplifies your own internal administration." However, while the trend gains currency it is the smaller vendors who could lose out. One of the areas where companies cut costs is by offering more to a limited number of companies, and extract volume discount. Says Avinash Vashishta, CEO, Tholons, a Bangalore-based advisory firm, "The smaller players aren't able to match the pricing offered by the big vendors. It's tough for the small services companies." R Chandrasekaran, president and MD for global delivery, Cognizant emphasises that deep domain expertise, broader range of services and expanded geographic footprint helps the large companies to score in vendor consolidation moves. As being lean in tough times becomes the norm, it will be the fat boys of offshoring who will gain. To see more of The Economic Times, or to subscribe to the newspaper, go to http://economictimes.indiatimes.com Copyright (c) 2009, The Economic Times, India Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. [ Back To the Online Project Management Community's Homepage ]