Australian telecom giant Telstra has reportedly dropped outsourcing partner Satyam Computer Services [Get Quote] from an applications support contract worth Aus $32 million annually.

The troubled Indian outsourcing firm's IT contracts with Telstra will be passed on to EDS, according to sources that were quoted by a The Australian daily on Tuesday.

Telstra Chief Executive Sol Trujillo, who leaves the company on June 30, sat on the board of EDS before joining the telco in 2005, the report said.

According to the daily, Telstra refused to comment on the report of dumping Satyam and said the decision about its supply arrangements with individual vendors was not for media release.

The Australian further said that new Satyam chief executive A S Murty is understood to have flown to Australia last week in a last-ditch bid to retain the Telstra contract and the Indian IT company placed a compelling case to continue with Telstra.

The recent fraud at Satyam is believed to have led to the fallout, but a source close to the deal denied that the IT firm's scandal was responsible for Telstra's decision to tear up its contract, saying it was instead linked to the Indian outsourcer's performance.

The decision was taken by a Telstra advisory board, which was advised by a US tender management company, sources said.

Outsourcing contracts held by Satyam, EDS, IBM Global Services and Infosys [Get Quote] could be trimmed as Telstra is in the process to reduce the list of major IT suppliers, from four to two, to reduce costs and streamline its providers.

The new contracts on offer, internally codenamed SSSP, require each of Telstra's suppliers to bid for application maintenance work on its legacy systems.

The total worth of the contracts is estimated to be up to Aus $200 million annually over five years.

The decision follows moves by Telstra classifieds subsidiary Sensis dropping multinationals IBM and EDS from its software testing and application development panel.

"Late last year we announced a number of our major IT contracts across four major suppliers -- EDS, IBM GS, Infosys and Satyam -- were up for renewal," Telstra spokesperson Martin Barr said, adding, ". . . we are taking this opportunity to consolidate all legacy IT work and we are planning to divide the applications between two companies."

Losing the Telstra account is a major blow for the struggling Satyam, as Telstra represents about 35 per cent of its Australian revenue.

The accounting scandal at India's fourth largest IT firm also led to National Australia Bank re-evaluating its relationship with it. NAB has delayed plans to send several core technology functions to Satyam's Indian operations.