FT : Indian Outsourcers Expecting “Crisis Dividend”

After facing one of their toughest years on record over the past 12 months, Indian IT companies are expecting a turnround in business as western financial groups look to outsourcing to help recover from the credit crisis.  Banks in developed countries are now seeking to implement new IT platforms to consolidate recent acquisitions.  At the same time, legislative changes in the US are expected to force through cost cuts in the credit card industry, and potentially in healthcare, that could benefit outsourcing groups.  “We are seeing banks ‘re-platforming’ at the moment,” said Steve Cardell, president of enterprise applications and consulting at HCL Technologies, which paid £440m ($700m) for Axon of the UK last year in the Indian outsourcing industry’s biggest overseas takeover.  “Partly because there were a lot of acquisitions that happened during the credit crunch, suddenly there’s a lot of work around merger integration in financial services.”

India’s outsourcing companies were hard hit by the first phase of the global economic crisis, when banks put on hold outsourcing deals, ranging from the implementation of new software to contracting out business processes such as handling mortgage applications.  Industry leaders such as Infosys Technologies, Wipro and Tata Consultancy Services reduced headcount, in contrast to their pre-crisis workforce growth rates of about 30% a year.  But most Indian IT companies are now predicting that the wave of cost-cutting that inevitably follows a recession will eventually result in a “crisis dividend” for their industry – increased outsourcing to countries such as India, where costs are lower.  US president Barack Obama’s crackdown on credit card practices and proposals for healthcare reforms are both expected to result in more work for Indian outsourcing companies.  Markets have cottoned onto the change in sentiment.  Indian IT stocks have risen 85% this year, beating a 63% rise in the benchmark Bombay Stock Exchange Sensex Index.  Ananda Mukerji, chief executive at Firstsource Solutions, predicted that rules to be introduced in the US next year – which would cap the interest rates and fees that can be charged on credit cards – would lead to greater outsourcing.  “It’s going to reduce the revenue opportunities for a lot of credit card issuers, so all the issuers are trying to figure out what the model is going to be,” he said.  Mr Mukerji said the other potential windfall for Indian business process outsourcing groups would be healthcare reform, which, if the proposed reforms are passed, could result in pressure on hospitals to reduce costs and a push to bring more people under the insurance net.  But analysts caution that it may take several quarters before these structural changes in clients’ business benefit Indian IT companies’ bottom lines.

Reference : http://www.ft.com/cms/s/0/6e3e12ba-ad17-11de-9caf-00144feabdc0.html

NASSCOM Strategic Review 2009

While the current mood is that of “cautious optimism,” the industry is expected to witness sustainable growth over a two-year horizon, going past its USD 60 billion export target in FY2011.  While the industry has significant headroom for growth, competition is increasing, with a number of countries creating enabling business environments aimed at replicating India’s success in the IT-BPO industry.  Hence, concerted efforts are required by all stakeholders to address the current challenges, to ensure that India realises its potential, and maintains its leadership position.

Full Executive Summary here.

Reference : http://www.nasscom.org/Nasscom/templates/NormalPage.aspx?id=55772

FT : India IT Majors Tap On Domestic Growth

India’s information technology sector, which rose to prominence by targeting overseas markets, has found an unexpected way to offset the global economic crisis: tapping the country’s growing domestic appetite for outsourcing.  The country’s top computer services groups, such as Wipro Technologies, are hauling in larger and more complex contracts from India’s booming mobile telephony industry and from an initiative in the central and state governments to upgrade systems.  “A 40-50% compound annual growth rate over the last three years – that is the sort of growth we have been driving in India,” said Suresh Vaswani, joint chief executive of Wipro, the country’s third largest IT outsourcing group.  India’s outsourcing industry has risen to become the foundation of the country’s modern economy through aggressive targeting of export earnings, which reached an estimated $47.3bn in the year ended March, up 15.8% against a year earlier. 

But the growth of India’s modern economy is bringing this cycle full circle, with the domestic information technology outsourcing market beginning to provide more opportunities for Wipro and peers such as Tata Consultancy Services.  The National Association of Software Services Companies, India’s IT industry body, calculates that annual sales in the domestic outsourcing sector have grown to $24.3bn from $13.2bn just three years ago.  While Wipro does not break out its India revenue, it says the domestic market accounts for a substantial portion of the 20% of its sales it earns from emerging markets.  Tata Consultancy Services, the industry leader, earns about 8% of revenue from India while Infosys, the number two provider, earns only a small portion but has a banking IT product, Finacle, which is widely used in India.  “The domestic market will never be an alternative for the revenue shortfall they might have from developed economies but it is definitely a capability boost as well as a nice hedge or a stable revenue earner for these companies,” said Milan Sheth, a partner at Ernst & Young, the professional services firm.  Contracts won by Wipro in India recently include the roll-out of technology for greenfield telecom operator Unitech Wireless, partly controlled by Norway’s Telenor.  Wipro has said that the contract is worth “multi-hundred millions” of dollars but the domestic media has reported its value at about $500m over nine years.  Unlike many overseas jobs, Wipro will build from scratch many of the IT systems for Unitech Wireless.

Reference : http://www.ft.com/cms/s/0/9d436bca-6ca6-11de-a6e6-00144feabdc0.html

Forrester Says Indian Outsourcers Can Provide Lower Rates

Benefiting from a depreciating Indian rupee against the U.S. dollar, lower staff costs, and internal cost-cutting measures, Indian outsourcers can provide up to 12% discount on current rates of offshore contracts, according to a report by Forrester Research.  The report is in response to a number of queries to Forrester from clients who wanted to know what discounts they should aim at in their negotiations with Indian vendors, said Sudin Apte, senior analyst at Forrester Research on Saturday.  Customers will however have to watch out for the impact the cost cutting by vendors may have on the quality of service offered.  More junior staff may be deployed on projects, and service providers are likely to invest less on innovation, Apte said.  Discussions for rate cuts must therefore include a stringent reassessment of service-level agreements, so that the provider does not cut corners, lowering quality and delivery, Apte added.  In the past 12 months, the Indian rupee has depreciated against the U.S. dollar by over 30%.  Indian outsourcers earn most of their revenue in U.S. dollars.  The depreciation translates into higher rupee realizations for Indian outsourcers, most of whom have more than 60% of their expenses in rupees.  Higher realization helped vendors improve operating margins by over 10%, Forrester said.  In a survey by the research firm about four months ago, as many as 65% of offshore clients wanted to negotiate rates, Apte added. 

Following the economic downturn, outsourcers have also cut their expenses in a number of areas including staff costs, marketing and discretionary spending, Forrester said.  Infosys Technologies, India’s second largest outsourcer, announced last week that it was freezing staff salaries for the year.  Hexaware Technologies, a mid-size outsourcer, said in March that some 350 staff that were not working on projects, would be paid 50% of their salary until the company finds projects they can work on.  As outsourcers hire less, staff attrition has dropped from 15 to 12 percent, and may even go into single digits, Forrester said.  Suppliers are benefiting from lower headhunting fees and staff replacement costs, while customers will benefit from higher retained institutional knowledge, as there will be fewer new members in the teams working for them, Forrester added.  On the flip side, the cost cutting is expected to affect innovation from suppliers as they are less likely to invest in research and development, Apte said.  Indian outsourcers are likely to cut down on new centers of excellence and on hiring senior people whose work is not billable, but are required by the company to build domain knowledge and consulting capabilities, he added.  Only high-end work that requires innovation from the service provider will however be affected, Apte said.  In a bid to cut costs, outsourcers are also cutting their “virtual bench” of staff who are not assigned to any project, but kept on the ready for any surge in demand from customers, or to counter staff attrition.  A quick ramp up of staff for project work will not be as easy in future, Apte said.

Reference : http://www.cio.com/article/489963/
Forrester_Room_for_Indian_Outsourcers_to_Lower_Prices

FT : Chinese Threat To Indian IT Outsourcing Dominance

China poses the biggest challenge to India’s IT outsourcing industry, which is expected to grow by an average 15% over the next two years, according to the chief executive of India’s biggest business processing outsourcer.  “China is a huge threat [to Indian IT groups].  Long-term that is the only real threat we [Indians] have,” Pramod Bhasin, chief executive of Genpact, told the Financial Times.  Mr Bhasin admitted that it was “pretty rough out there” for Indian outsourcing companies, but said some would pick up business from clients needing to cut costs and preserve cash.  He said the Indian outsourcing sector, which commands about 51% of global share, would slow from recent growth rates of 30% a year, but would continue to expand.  On China, he said: “There are no big players at the moment, but their government is investing in the sector, [and] pushing out English education much earlier.”  In January, Beijing started offering incentives, including tax breaks and subsidies, to the outsourcing industry, in an effort to help it grab more market share.  Egidio Zarrella, KPMG partner and IT adviser, said China was likely to become a global leader in IT outsourcing, serving domestic businesses and swathes of the Asia-Pacific region.  “China is on the ascendancy,” said Mr Zarrella.  “Not only are they learning English, but they are also training in Japanese, which is a very profitable market where the Indians have been struggling.”

However, a recent McKinsey report said China’s IT sector was too fragmented and that domestic companies were not as accustomed as other countries to outsourcing non-core activities.  It also said China lacked graduates with sufficient professional management skills.  “China is doing very well compared with itself historically, but compared with the global industry, it is not growing fast enough to catch up,” said Alex Peng, a partner at McKinsey.  China’s top 5 outsourcing companies have been growing at about 20% annually, slower than their Indian peers.  Mr Bhasin agreed that China was not an imminent threat, but said Beijing’s incentive package was a clear sign that it was aiming to encroach on India’s $60bn IT services market.  Including the Philippines and Malaysia, the global outsourcing industry will be worth about $150bn by 2012, according to McKinsey.  “When the Chinese set their mind on something they do it – and they tend to execute things a hell of a lot better than the Indian government does,” said Mr Bhasin.  The Indian government had never supported the IT industry properly, Mr Bhasin said, for example failing to provide basic infrastructure: “We supply our own power, our own security, our own training and transportation … If India doesn’t do reform properly there is a possibility that its market share will drop.”

Reference : http://www.ft.com/cms/s/0/bd3e8548-fd22-11dd-a103-000077b07658.html