Big multinationals dumping excess vendor baggage

A slew of big multinationals, including the world’s largest telecom operator, Verizon, and capital equipment maker Applied Materials, are going the British Petroleum (BP) way of pruning the number of technology vendors to cut costs as they look for ways to come out of the worst recession in years.

Verizon, Chevron, Applied Materials, Best Buy, Cardinal Health, Home Depot and many other companies that do business with at least 40 IT vendors are set to prune their vendor list drastically, say consultants and analysts.

Early this week, BP cut the number of its vendors from 40 to five, in a move that will help it save $500 million. As many as 60 Fortune 100 companies are expected to follow suit, an analyst said. “The next 12 months will see a fair number of deals triggered by vendor consolidation,” said Partha Iyengar, research director at research and advisory firm Gartner India.

Applied Materials, one of the largest suppliers of semiconductor and display manufacturing equipment, has identified opportunities for vendor consolidation in data centre co-location and telecom services, the $9-billion firm’s group vice-president and CIO Ron Kifer said. The US firm’s large vendors include IBM, TCS and Wipro.

TCS says it’s in discussion with at least three customers looking to consolidate vendors. “These are Fortune 500 companies in the retail and banking & financial services space,” said S Ramadorai, the CEO of the country’s largest software services company.

A Fortune 500 bank is evaluating options to reduce its infrastructure management and data centre partners from 10 to two, while one of the world’s top five retailers is looking at reducing its technology vendors from around 80 to 25-30, a person aware of the development told ET, but declined to give details.

A Fortune 50 drugmaker, which presently has about 100 vendors doing tasks like data mining, drug distribution and supply chain management, wants to reduce its vendor list by at least 60%, another person said, requesting anonymity.

The move will help these firms get into more strategic relationships with vendors, get better pricing by increasing volume of work to technology suppliers, reduce governance overheads and cut costs by 12-15%.

According to Chandramouli CS, director, advisory services, of technology consultancy Zinnov Management Consulting, 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,” he said.

Also, too many relationships reduce buying power and increases risks. For instance, banks, which have to ensure there is no data theft, will reduce risks when they cut the number of vendors managing customer information. Similarly, for companies engaged in healthcare, having only a handful of vendors makes it easier to manage relationships and tackle leaks, 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,’’ said V Balakrishnan, CFO of India’s second-largest IT exporter Infosys Technologies.

The development spells big gains for large IT services players. R Chandrasekaran, president and MD for global delivery at software firm Cognizant, said deep domain expertise, broader range of services and expanded geographic footprint help large companies to score in vendor consolidation moves.

But life will become much more difficult for smaller companies. “The smaller players aren’t able to match the pricing offered by the big vendors. It’s tough for the small services companies,” said Avinash Vashishta, CEO of Bangalore-based advisory firm Tholons.

Already hit by the global recession, small vendors may now become easy acquisition targets for the bigger ones. To survive, the obvious lesson for them is to develop expertise in niche fields. As being lean in tough times becomes the norm, it will be the fat boys of offshoring who will gain.