Published August 26, 2008

SingTel's IT services unit set for shake-up

By WINSTON CHAI
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BY MAKING a swoop for SCS (Singapore Computer Systems), SingTel has netted an unassailable technology services lead in the local government sector, along with additional revenue streams from burgeoning IT markets across the region. What is left unsaid, however, is that the resulting duplication could well lead to a sweeping revamp of SingTel's IT services operations in Singapore.

When the Republic's largest telco reported Q1 profits that were below market expectations earlier this month, analysts were quick to question the company's growth prospects in the near term. SingTel's overseas associates such as Telkomsel and Optus both turned in lacklustre performances, while its mobile stronghold in Singapore continues to be hit by a double whammy of thinning margins and higher customer acquisition costs.

But instead of moving to address these concerns, SingTel chose to bolster its IT services bottom line yesterday by acquiring control of SCS through its wholly owned subsidiary NCS. The 60 per cent stake was bought from Temasek Holdings unit Green Dot Capital for $140 million. Green Dot has made known its intention to review its SCS stake since July 30 and the sale to home-grown NCS comes as no surprise. SCS is a major supplier of IT services to the Singapore government and the acquisition by locally bred NCS sidesteps possible security and confidentiality concerns, especially among sensitive departments such as the Ministry of Defence.

From a market share perspective, the SCS acquisition is a match made in heaven as it gives NCS an undisputed lead as the top technology supplier to the Singapore government. The two companies consistently rank among the top three IT service providers to the public sector and the consolidation can only solidify this market position.

More importantly, the acquisition will lift NCS's sales and lost morale by putting it back in the driver's seat for the $1.3 billion SOEasy (Standard Operating Environment) outsourcing contract, the largest deal ever dished out by the local government.

The eight-year agreement was awarded to SCS and its US-based partner EDS International in February this year even though NCS was tipped as the firm favourite to win the tender.

SCS's order books for this year has already reached a record high of $720.1 million. This provides a valuable addition to NCS's overall income as its parent SingTel braves stronger headwinds in its high-profile mobile and broadband businesses.

In addition, NCS, which has focused its overseas expansion largely in markets such as the Middle East and China, can now gain entry into more technology hotbeds in Asia.

Besides China and Malaysia, SCS has offices in Brunei, Indonesia, Thailand and the Philippines, IT markets that are widely tipped to buck the downward purchasing trend in US and Europe.

Besides these obvious merits however, a number of glaring issues remain unaddressed from yesterday's announcement.

By gobbling its arch-rival, NCS now faces the issue of operational redundancy as there is a major overlap in both companies' product offerings and business functions. NCS will need to move quickly to align SCS's operations in order to maximise the benefits and synergies that the acquisition promises.

The buyout could also raise the ire of smaller IT service players here, given the firm grip that NCS will now have on the government's IT purse strings. These could result in complaints to watchdogs such as the Competition Commission of Singapore, throwing possible roadblocks onto the acquisition path.

However, NCS can take comfort in the fact that it has now secured a seasoned problem solver through SCS chief executive officer Tan Tong Hai. The local IT industry veteran has been credited with many turnarounds in Singapore's brief technology history.

He steered SCS back to profitability shortly after taking the helm in 2005 following years of losses, and the firm continues to dazzle the market with sizzling profits quarter after quarter.

He did the same for Pacific Internet (now known as PacNet). The winning of the government's SOEasy tender this year comes as another major coup.

Given Mr Tan's illustrious track record, a new steward for SingTel's IT services arm could well be first of many changes that are set to follow.