IT Outsourcing India

NEW YORK: Hewlett-Packard Co is considering selling or shutting parts of its outsourcing business to focus on the higher-margin areas of its technology services offering, people familiar with the matter said. A year after buying Electronic Data Systems for $13 billion, HP executives are discussing the possibility of divesting parts of the outsourcing operations, especially in its business process outsourcing (BPO) arm, sources told Reuters.

"The calculation is, can we get more cash for this asset now versus the cash flow the asset is expected to generate in coming years?" said one of the sources who is familiar with HP’s plans. HP’s India operations or its human resources BPO unit could be among the businesses divested, the source added. Housed within HP’s services division, the BPO unit posted $709 million in revenue in the quarter ended April 30, compared with $40 million a year ago.

HP got most of its technology outsourcing and BPO business from EDS, a pioneer in the field, which it bought in August 2008. HP may decide not to sell anything if the assets fail to fetch a good price, the sources said. If the assets were to be shopped, outsourcers like TeleTech and Stream Global Services could be interested, a second source said. HP is expected to issue its fiscal third quarter results later on Tuesday.

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The acquisition of US-based BPO firm McCamish Systems will boost Infosys’s capability building exercise more than its financial strength in the near term. Business process outsourcing (BPO) operations constitute just 6% of Infy’s total revenue. Hence, its latest shopping will not have any significant impact on future performance, apart from marginally impacting its net margin.

In 2008, McCamish had reported $38.2 million in revenue compared with Infy’s $4.7 billion. Infy’s BPO unit, Infosys BPO, has reported a revenue of $274 million in the past four quarters. According to the management, the current revenue run rate of McCamish is close to $27 million, which is lower than that in 2008 due to the US recession.

Given the current revenue, Infy’s BPO would be able to augment its revenue base by at least 10%.

The $38-million deal may go up by another $20 million, if McCamish meets certain operating targets in future. If these conditions are met, then Infosys BPO would pay nearly 1.5 times McCamish’s 2008 sales.

It is difficult to measure the valuation in terms of operating income since McCamish had ended 2008 in operating losses due to tough business conditions in the US financial and insurance sector. According to Infosys BPO CEO and MD Amitabh Chaudhry, MCCamish has historically operated at operating margin of 15%. The deal value is about seven times operating income, which is in line with the industry trend.

The deal will reduce Infosys’s Rs 12,273 crore strong cash base by a tad Rs 300 crore. Considering an average return of 8% on this amount, which Infosys will have to forgo, after it pays for the deal, its net margin is likely to drop by 30-40 basis points from the current 27.6%.

Infosys would not carry on its balance sheet any accumulated losses of McCamish, according to Abraham Mathews, CFO of BPO operations. This is because, McCamish follows a pass-through taxation system wherein incomes and losses are passed through to the partners of the company. Though minuscule, the acquisition is of strategic significance.

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An improvement in the overall business climate has prompted Indian outsourcer Infosys to raise its revenue and earnings forecasts despite posting a slight drop in quarterly profit today.

Revenue at the IT services firm reached US$1.15bn (AU$1.27bn), a 5.1 percent decline on the same quarter a year ago but a 2.9 percent increase on the previous quarter.

Infosys expects revenue to reach approximately $4.6bn (AU$5.09bn) for the full fiscal year, which signifies a one per ent drop on last year’s numbers.

While the results have surpassed Infosys’ own expectations, the company’s predictions for the future are rather conservative.

Reasons for this approach include the absence of significant market growth, high unemployment and currency volatility, said Infosys head of Europe BG Srinivas.

“The worse is likely to be over, but I will still view the future conservatively while being cautiously optimistic,” he said.

Infosys was reported to be chasing some 12 to 15 outsourcing deals worldwide. But Srinvas said the sales processes are taking longer than usual as clients focus on supplier consolidation and strategy reviews.

Infosys is still hiring 2,000 staff globally with a view to expanding its sales capability. The firm reported that it is hiring senior technology architects and business consultants.

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In a bid to expand the customer base, Mahindra Satyam, earlier known as Satyam Computer Services Ltd., on Tuesday said it is planning to tie up with Saab, a military defence and civil security solutions provider, to develop its India operations. Saab’s outsourcing contract to Satyam is estimated to be between $300-$400 million and is one of the largest customer wins in the recent past.

“This collaboration is a strategic step towards synergizing Satyam’s unique strengths in mission critical systems, ERP, engineering services, avionics and integration and Mahindra’s Systech’s manufacturing capabilities and engineering excellence,” said Anand Mahindra, Vice CMD, Mahindra Group.

The contract would also cover areas such as homeland security where focus is planned for end-to-end security solutions. “We view this relationshipa with Mahindra Satyam as a strategic meeting of two highly skilled teams believing in techincal and engineering excellence,” said Ake Svensson, President & CEO, Saab.

According to the initiative, Satyam and Saab will jointly address the Battlefield Management System (BMS) — which is field proven and deployed across many countries — for the Indian Army.

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