India IT Majors’ Growth Track

Wednesday, October 20, 2010

From Business Today dated Oct 17, 2010.

(click for full image)

India’s outsourcing groups may be keeping a wary eye on China but the world’s second-largest economy does not necessarily spell doom for the subcontinent.  Tata Consultancy Services, India’s largest outsourcing services group, last month said that it would double its headcount in China, a clear signal that the Indian sector is keeping a close eye on a market that could evolve into a serious competitor.  The threat appears clear enough.  China’s outsourcers are set to grow at a faster pace than India’s over the next few years, according to analysts.  “The Chinese outsourcing sector is bound to see the same curve the Indian industry had before – they are in for incredible growth,” says Egidio Zarrella, a partner at KPMG.  “There’s paranoia among the Indians because they remember what they did to us [in the west] – rolling up our markets in just a couple of years’ time,” the China head of an American outsourcing group says.  “They fear the Chinese are going to do the same to them now.”  The Chinese government has offered strong support to the industry, including incentive packages and tax breaks, in the hope of emulating India’s success and creating millions of jobs.  Beijing’s declared goal is to create 10 internationally competitive outsourcing hubs, encourage 100 multinational companies to outsource to China and develop 1,000 Chinese outsourcing services vendors that are qualified to serve the global market.  As a result, the Chinese are now increasingly picking up orders in the US and Europe, traditional strongholds for Indian companies.  Last year, all top 10 Chinese outsourcing services vendors saw revenues from US and European customers rise and in some cases outgrow the portion of business that is derived from Japan and South Korea, where they initially started offering services.  HiSoft, the third-largest Chinese offshore vendor, which went public on Nasdaq in June, serves a smattering of global clients including AIG, Microsoft, and Citigroup.

However, some say fears of a Chinese challenge to the Indian industry globally are mostly overblown; partly because the Chinese industry is still relatively small and fragmented; but also because China, unlike India, boasts a big potential domestic market. China’s IT services exports were worth just $9.6bn last year while India’s were $49.7bn, according to CLSA, the brokerage.  Neusoft, the largest Chinese player, reported Rmb4.2bn ($618m) in revenues last year, less than one-tenth of Tata Consultancy’s revenues of $6.5bn for the financial year ended March 31.  Not a single Chinese outsourcing group approaches even 10% of TCS’s headcount of 160,000.  In addition, Indian and Chinese outsourcing services vendors often still do not compete head-on, according to analysts.  “The pie is growing rapidly. It’s not a question of India versus China, there’s room for everyone,” says Sidney Huang, chief operating officer of VanceInfo, China’s second-largest IT services company.

The main reason is China’s potential domestic riches.  IT services account for only 13.8% of China’s total IT market compared with a 30.3% share for Asia-Pacific overall, according to IDC, the research firm.  That number will increase as government requirements for more efficiency push local groups to step up outsourcing, IDC analysts argue.  There are already signs that this is happening. At $8.1bn, China’s domestic IT services market was bigger than India’s with $5.8bn last year, according to CLSA, and many Chinese outsourcers are now increasingly looking to the local market for business.  “In the past four years, China has been the driver of our business,” says Mr Huang of VanceInfo.  In 2006, the domestic market accounted for just 5% of the company’s revenues, but in the second quarter of this year, that share had soared to 45%.  HiSoft says its domestic business has soared over the past six quarters.  “By the end of 2010, China will account for 10% of our revenues, but by 2012 it’s expected to be 40%,” says Ross Warner, vice-president.  Both Indian and Chinese outsourcing companies are preparing for the bigger, long-term opportunity of business from state-owned banks and telecommunications operators in China.  But that day is still distant, analysts and executives say. “IT services demand in this segment is still primitive,” says Mr Huang of VanceInfo.

Reference : The Financial Times Sep 8th 2010

Mind Map : Indian BPO Industry

Thursday, February 11, 2010

(click for full image)

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 :

NASSCOM Strategic Review 2009

Thursday, July 16, 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 :

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 agoWhile 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 :

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 :