Vodafone looks to slash cost base with £560m outsourcing deal

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Vodafone is set to slash hundreds of millions of pounds from its cost base by outsourcing certain software development functions to the IT giants EDS and IBM.

The move will affect 6,300 staff across Vodafone's global operations, the majority of which are external contractors.

The outsourcing deal forms one part of Vodafone's strategy to offset pressure on its traditional revenue base in mature markets such as the UK, Germany and Italy. The company has restructured its tariff structure in those regions and put plans in place to offer broadband internet services to its customers to protect its existing revenue base. It has also invested in emerging markets assets in regions such as Turkey, Africa and India to drive revenue growth.

Simultaneously, Vodafone is considering ways to cut costs across its operations and has committed itself to slicing between 25 and 30 per cent off its IT spending within three to five years.

The mobile phone company identified its applications development and maintenance operations - which develop systems for billing and other customer services - as an area where costs could be trimmed. The company has spent £560m on such activities over the past year.

Vodafone has already started to drive cost savings at the IT level by consolidating its data centres and centralising its logistics systems. Arun Sarin, chief executive of Vodafone, said: "We are exploring the possibility of outsourcing other non-core activities so that we can focus on our customers."

Vodafone has named the US companies EDS and IBM as preferred suppliers to take on its applications development activities after whittling down the list of 11 interested suppliers over the past eight months. It has not finalised the terms of the deal and declined to say what the deal would be worth to the IT companies. Such deals tend to run for about seven years.

The two IT suppliers will reduce the number of external suppliers used for application management across Vodafone's global operations. The mobile phone company also said that it expects the quality of the software produced to increase as a result of the outsourcing, which should result in a faster deployment of services to customers.

Some 6,300 staff will be affected by the outsourcing, 3,700 of which are external contractors.

Vodafone will retain key staff to maintain control of the software development, and is in discussions with staff likely to be transferred to ensure minimum disruption.