T-Systems and Cognizant form SI partnership

T-Systems has announced that it has entered into a systems integration alliance with Cognizant. The companies have joined forces to offer systems integration (SI) services, particularly to European-headquartered corporations that operate worldwide. As part of the agreement, T-Systems India's operation, with about 1,150 staff, will be sold to Cognizant at book value.

Comment: After a year-long period of speculation about the future of T-Systems, it has finally announced a partnership with US player Cognizant. Up to this point T-Systems has been exploring different scenarios that would help to grow its international business, whilst expanding its meagre offshore capabilities.

It has considered scenarios whereby parts of T-Systems would be sold or, alternatively, brought into a joint venture with a partner possessing strong offshore capabilities and vertical expertise (in addition to T-Systems' expertise in the automotive and telecoms sectors). At times it has looked as though its plans would fail altogether and there have been rumours that potentially interested parties (amongst them leading IT services vendors) were alienated by the high restructuring costs involved and consequently lost interest.

Would T-Systems eventually end up in the hands of venture capitalists such as Cerberus, with no genuine knowledge of the IT services industry‾ All this has unsettled clients and was partially reflected in the decline of new orders and revenues.

The alliance with Cognizant is limited to five years, but allows for further extension. It is based on a customer-specific joint sales and delivery model in selected markets where the revenues are split, but with each vendor still looking after their top five clients. Both partners will commit to exclusively work with each other as far as SI is concerned. However, where possible, both parties will cross-sell elements of each other's portfolio such as infrastructure services.

By choosing Cognizant it seems T-Systems met its search requirements well: Cognizant, though headquartered in the US, possesses extensive resources in low-cost locations; 73% of its 55,000 staff are mainly based in India, but also in China, Argentina and Hungary, making it significantly cost competitive. Furthermore, it has a strong presence in the US, with about 15,000 employees or 27% of staff situated there. This is an important factor for T-Systems since a large part of its clients' business has to be supported in the US.

In addition, Cognizant brings to the deal a depth of expertise in the financial sector, where it generated 47% of its €1.39 billion/US$2.14 billion revenues in FY 2007, as well as in the healthcare sector which generated 24% of revenues. In particular, its expertise in the financial sector - a major driver of the IT services industry (and from which T-Systems had to withdraw from due to its lack of industry-specific expertise) - must be a big plus for T-Systems.

By selling its own offshore resources, T-Systems has set itself apart from its competitors most of which are expanding their offshore capabilities. Rather than investing here, it has chosen to give up control of its offshore delivery and to share its improving margins with Cognizant.

What is in it for Cognizant‾ Cognizant is the fastest growing tier one offshore focused player: it boosted its 2007 revenues by 50%. It's aiming to keep this momentum up and wants to reduce its dependency on the US market (where it generated 83% of revenues in 2007) by increasing its European business (which accounted for 16% of revenues).

 

It also plans to grow critical mass in India while gaining greater exposure to T-Systems' European and US customers.

However, we wonder what committing to work exclusively with each other on SI really means for Cognizant‾ Under what circumstances would it actually give work to T-Systems and where‾ This is unlikely in the US, so in Germany, perhaps‾ And is the definition of SI perhaps so loosely defined that Cognizant will end up passing very little work to T-Systems at all‾  

For both vendors this alliance adds operational scale and opens the chance to expand their respective geographic footprint and vertical expertise, whilst avoiding the financial risks associated with an outright acquisition. This move offers a lot of promises and its success depends on the execution. It remains to be seen how fast this alliances will be able to produce the necessary cost savings required for T-Systems to be competitive and how well both companies can work together, though Cognizant has demonstrated this ability on several other occasions where it has entered into partnerships or acquired companies.

Cornelia Wels-Maug, Senior Analyst

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