The CSC-HCL Partnership – Lots of Potential, but Doubts Remain

The recent announcement of a partnership between Computer Sciences Corporation and HCL Technologies, comprising joint delivery of application modernization projects and HCL white labelling CSC’s private cloud solution BizCloud, looks good on paper, but the long term payback of the deal remains an open question.

The two elements of the partnership are closely related – CSC expects most of the refactored applications to be cloud-based.  Initially, the partnership will focus on banking and telecom, with plans for a banking center of excellence. Investments, costs and revenues will be shared. A focused delivery infrastructure would be carved out of existing delivery capacity in India, and most employees will be new. The sales teams will remain separate, with no joint go-to-market in the cards. The partnership will not involve a formal legal structure such as a joint venture, and the ‘alliance’ already has its first client in AT&T.

CSC and HCL Technologies have complementary strengths. CSC’s (nearly) US$15 billion in revenues, strong public sector and banking heritage, owned cloud infrastructure, and tier 1 service provider status bring in numerous private cloud and application modernization opportunities. However, CSC’s offshore presence – 23, 000 by last count – is paltry for a service provider its size.  Accenture has over 80,000 and IBM over 100,000. HCL Technologies has over 70,000 and is among the ‘big five’ India heritage service providers. Also, HCL’s growth in infrastructure services has been meteoric.  With a third the size of CSC, the firm’s invitation rate in advised deals with an infrastructure component is similar that of its much larger partner. Lastly, HCL Technology does not have private cloud infrastructure of its own. CSC does (the BizCloud) and has made an acquisition in the cloud space – ServiceMesh for cloud brokerage. CSC also has a significant infrastructure partnership for cloud – with AT&T.  In summary, both CSC and HCL have advantages that would be very hard for the other to replicate.

On paper the deal sounds impeccable. One partner brings in the accounts and perhaps one or more component of expertise and delivery, and the other partner brings in the remaining pieces of delivery. CSC’s partnership with AT&T is predicated on a similar argument. AT&T provides the scale and capacity and CSC the business knowledge, clients, and application delivery expertise.  Most service providers find it nearly impossible to be equally adept at managing client relationships across a broad array of industry sectors, providing high- scale infrastructure in a market that also features Amazon and Rackspace (and IBM) and offering the offshore delivery capacity of an IBM or an Infosys with its US$200 million-plus employee training budget.  From CSC’s point of view, a partnership-based approach comprising vendors from different parts of the value chain such as AT&T and HCL is perfectly rational. By ISG’s estimates ADM contracts worth over US$15 billion are expiring in 2014. The opportunity is clearly sizable.

However, the banal point that such partnerships do not always end up well must still be made. “Coopetition” is a term commonly used for such arrangements. In practice, defining where cooperation ends and where competition begins for two service providers is far from clear. From the press releases issued by the two companies and the conversation the CSC CEO Mike Lawrie had with analysts on January 15th, how ‘application modernization’ is defined isn’t clear. The analyst call presented a very specific vision regarding the banking sector and the partnership’s immediate priorities. Engagements in banking are likely to focus on modernization of Hogan Systems’ environments and the Celerity banking platform. Hogan Systems was CSC’s original core banking platform, and Celerity was introduced in the late 2000s as a successor to Hogan Systems.  The initial days of partnership would also involve SAP’s banking portfolio. This is specific enough. However, this would be just the beginning and the future would involve many different kinds of application modernization initiatives across all major industry sectors.  Without clear demarcation of territory the partnership would be hard to scale.

By ISG’s estimates CSC and HCL Technologies together account for well over 5% of the global infrastructure outsourcing market. The market impact of an entity that works together and leverages cross sales opportunity in the ‘cloud enablement of legacy applications’ niche is not trivial. But realization of that massive potential would require a clear delineation of the alliance’s scope.