HCL Bags Half Billion Dollar Contract With Merck; Sign Of More Mega Deals

May 12, 2010

HCL Technologies, India’s fifth-biggest IT services company has been awarded a $500 million IT outsourcing deal from Merck Sharp and Dhome (MSD) based in the U.S. The contract with one the drug-making giant is indicative of the comeback of large-scale agreements within the IT sector, particularly in India.

Big deals totaling $300 million or more were more or less nonexistent in the wake of the global recession stemming from the subprime debacle in the U.S. The size of contracts had dwindled to approximately $50 – $120 million with CIOs cutting IT budgets during the downturn in the economy. Some of the highest bids for contracts that come close to the HCL-Merck agreement include Citibank’s 2.5 million dollar agreement with TCS in 2005, TCS’ $848 million contract with Pearl Group based in the U.K. in 2008, and ABN Amro’s $4000 million IT contract with Infosys and TCS in 2005. HCL Technologies shares went up to 52-week highs to approximately $10 after announcing the deal during market hours and closed at $9 on India’s benchmark, BSE stock index.

TPI’s India Partner Sid Pai, a consultant on large IT restructuring deals told the Economic Times of India Times, “It’s not the biggest but one of the mega deals we have seen in recent times, post downturn. The deal indicates a shift towards more outsourcing contracts than offshoring. Clients seem to look at leveraging the global delivery capabilities of vendors. It indicates a potential for more such deals this year.” Merck will presumably take advantage of HCL’s nearshore delivery facilities based in North Carolina along with global delivery centers in Krakow, Poland and Shanghai, China. In an attempt to boost onshore delivery for Merck at Raleigh, North Carolina by hiring more U.S. citizens for the project.

Prem Kumar, HCL Technologies president for BFSI and healthcare said in a statement, “The consolidation in the pharmaceutical space along with the challenges they face on the patents front, coupled with a push from the Healthcare reforms in US presents an exciting opportunity for Indian IT service providers.” Kumar continued to say that this was the single largest contract amount for HCL. Noida-based HCL is planning to offer BPO services, enterprise application development, remote infrastructure management (RIM) for Merck. The deal is expected to carry over into the next five years. Revenue from the Merck deal is expected to flow in from the present quarter. In the current year period, from January to March, revenues from healthcare and Lifesciences made up of 8% of the total $685 million revenue for HCL. Other Indian IT service providers like TCS, HCL, Wipro and Infosys are already offering their services to multinational pharmaceutical majors like Novartis, GlaxoSmithkline and Pfizer.

Other offshoring activities typically outsourced to India include web development firms, and software development firms. The outsourcing industry has been growing steadily at a 2-3% rate in the wake of the recession – one of the few industries that remained unaffected by the global economic meltdown. Healthcare and pharma sectors around the world combine to contribute a whopping $47 billion outsourcing opportunity that is being tapped by nearshoring, onshoring and offshoring companies. Alarmingly, IT-BPO spending by pharma firms have been adding at a growth rate of more than 20%, according to statistics from NASSCOM, India’s IT industry organization. The HCL-Merck deal is expected to reel in more companies seeking to take advantage of low costs linked to operations in the Indian IT services sector.


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