On 18 December 2009, T-Systems South Africa completed its purchase of IT service company Arivia.kom from its state-owned parents, energy company Eskom and transport company Transnet. T-Systems will take on Arivia.kom's outsourcing and system integration contracts.

This is the biggest outsourcing deal yet in the fragmented South African IT service market. The three largest providers in 2008 together held only about 25% of the market, and this acquisition will likely change the rankings, making T-Systems the largest information and communication technology (ICT) outsourcing provider and overall third-largest IT service provider in the country. We believe this deal will encourage further market consolidation.

With this deal, T-Systems has taken a significant step to diversify its revenue sources. We expect South Africa's IT service market to grow 7.7% in 2010, and T-Systems' expertise in reducing clients' ICT costs will be a valuable selling point in a market known for its high telecommunication costs. The acquisition will also give T-Systems:

• Improved international presence. Arivia.kom will give T-Systems better English-language capabilities and about 1,200 new employees, more than doubling its presence in South Africa and expanding its global delivery network.
• Clients in utilities and the public sector. These industries complement T-Systems' strengths in the financial services and automotive industries and should give it a stable revenue stream.
• Stronger compliance with local black economic empowerment (BEE) regulations, particularly equity employment.

T-Systems faces several risks. This large acquisition follows two other major outsourcing transactions; the significant changes to T-Systems' operations may cause disruption for some customers in South Africa. T-Systems also needs to manage shortages in the availability of local skilled IT staff, and learn to work within the sometimes arduous purchasing and operational processes of its new South African public-sector clients.

South African IT service clients:

• Prepare for market consolidation by checking your contracts' terms and conditions. When only a few providers have all the qualified ICT staff, prices may rise.
• Revisit contract pricing using T-Systems as a lever to make your providers more competitive.

• "Analysis of South Africa as an Offshore Services Location" — South Africa's language skills are a boon for outsourcers, but it suffers from high ICT costs. By Susanne Matson and Ian Marriott
• "Emerging Market Analysis: IT, South Africa, 2010 and Beyond" — The IT service market in South Africa is dominated by local providers that compete hard on price and partner often to cope with skill shortages and regulations. By William Hahn and others

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