IT Outsourcing India

According to outsourcing consultancy TPI’s report, the number of contracts worth at least $25 million in value dropped to 141 in the first quarter of 2009 from 160 in the October-December period

Hyderabad: Outsourcing of large information technology contracts in the first three months of 2009 has declined 21% from the preceding quarter, a trend that’s set to continue in the near term, US-based technology outsourcing consultancy TPI says in its latest report.

The number of contracts worth at least $25 million (Rs125 crore) in value dropped to 141 in the first quarter of 2009 from 160 in the October-December period, TPI said on Thursday.
The cumulative value of all the contracts awarded during the quarter dropped to $19 billion from $24 billion earlier. Historically, this is the lowest first quarter since 2001 in terms of total contract value, the consultancy said.

“Financial services clients have not gone back to the original levels of outsourcing. Cycle times are longer with hesitation among clients for longer-term deals,” analysts Surendra Goyal and Vishal Agarwal of Citi Investment Research said in a note to clients, reacting to the TPI report.

“Reducing prices is not an incentive enough for the buyer to go ahead in this environment.”

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With business from the US and Europe expected to decrease due to the ongoing financial turmoil, Indian information technology services IT firms are increasing their focus on the Asia Pacific region, particularly China, in an effort to tap the latters IT market and use it as a strategic base to enter the at least USD100 billion Rs4.76 trillion a year Japanese IT market. Business from the US and Europe together account for between 80 percent and 95 percent of revenues of the top five Indian IT services firms, Tata Consultancy Services Ltd or TCS, Infosys Technologies Ltd, Wipro Ltd, Satyam Computer Services Ltd and HCL Technologies Ltd.

This crisis provides the right opportunity for Indian IT companies to try and gain more traction in the Asia Pacific region, especially in big markets like China and Japan, said industry lobby group National Association of Software and Services Companies Nasscom president Som Mittal. The association estimates the Japanese IT services market at USD108 billion, and Indias share at USD11.5 billion. Around 8 to 10 percent of this work is offshored, with at least half of that going to China.

Market research firm IDC estimates the Chinese IT services market to reach at least USD55 billion by 2010.

TCS entered China in 2002 with a software development and delivery center. While its initial objective was to serve its global clients having Chinese operations, the company has now started addressing the regional and local market. Currently, it has 1,300 employees working in China. In its latest annual report, TCS said its China operations had managed to break even.

According to Girija Pande, executive vicepresident and head of Asia Pacific division at TCS, the Chinese IT market is growing by at least 20 percent annually and revenue from the companys Chinese operations will grow by around 45 percent in the next two years. In the short term, we will be expanding our presence and increasing the headcount to at least 5,000 by 2011, said Pande.

Similarly, Infosys has a 1,000strong workforce in China and said it is in expansion mode. We have expanded our operations in two cities Shanghai and Hangzhou, a company spokesperson said in an email response. The companys Chinese subsidiaries, however, were still lossmaking, according to the companys second quarter results.

Satyam admitted it is yet to make significant headway with its China operations but said it is in expansion mode with an eye on the longterm.

The company currently employs around 1,000 people in its two subsidiaries in China and plans to scale up headcount to nearly 2,000 by 2010. It is also investing in a training centre in China, which will have a capacity of at least 2,500 by 2010.

It is still a mystery why Indian companies have not been able to get any significant share of outsourced work from China and Japan, said Virender Aggarwal, head of rest of the world operations for Satyam.

Analysts acknowledge that China has been a rather difficult market for a variety of reasons.
So far, the Chinese domestic market has been one that is difficult to engage, primarily because of state and public sector dominance, said Milan Sheth, partner and head of IT outsourcing advisory at audit and consulting firm Ernst and Young. It is critical to have a well connected and established Chinese local partner who can help penetrate that market, he said.

TCS said it views China as a better base to address the Japanese market. A significant share of outsourced work from the Japanese market is cornered by Chinese companies, as they have a relative cultural and linguistic advantage over their Indian counterparts. We see being present in China as the first step in building the right relationships, said Pande.

Both TCS and Satyam are betting on local talent to succeed in their Chinese operations and help the company better address the local market as well as help build bridges with Japanese companies. At least 90 percent of TCS workforce in China comprises local hires.

Nasscoms Som Mittal said that the size of the Japanese IT market and the potential for outsourcing presents a huge opportunity for Indian IT firms, but, he added that the market has been relatively insulated due to language and cultural barriers. However, we see an increasing desire among Japanese companies for sourcing competitively priced IT services from foreign companies. More importantly, the factors limiting market penetration by Indian companies are being recognized and addressed by the Japanese themselves.

Nasscom has set up a Japan desk to explore ways for Indian IT companies to adapt themselves to compete more effectively in the Japanese market. Both China and Japan are longterm plays, said experts.

It is very important for Indian IT companies to understand that investments in the Chinese market should be done with a long term view. Given the nature of that market, it is unrealistic to expect quick turnarounds, Sheth said.

Source : http://www.offshoringtimes.com/

India’s share of the market is set to double between 2008 and 2010, says Gartner, citing demand for cheaper options during a global recession

According to Gartner, Indian companies’ share of the BPO market is set to double between 2008 and 2010.

The analyst house puts the growth down to thirst for cheap BPO spurred by the recession.

North America and the United Kingdom have shown the strongest growth for Indian BPO, according to Gartner, which found the telecommunications, manufacturing, insurance and banking sectors among the keenest users of Indian BPO, with public sector and retail among the most reluctant users.

According to Gartner, the top 20 India-centric BPO companies generated US$4 billion in revenue in 2008—5 percent of the US$80 billion created by the biggest 150 business process outsourcers worldwide.

Source : http://www.businessweek.com/

BANGALORE: When top officials from Infosys Technologies met executives at BT, the Indian company’s biggest customer, a few weeks ago in London, the discussions were more about helping BT cope with an almost 20-30% lower IT budget by renegotiating some of the existing projects at around 10-15% lower billing rates.

 Clearly for Infosys, which has always commanded premium rates from large customers, this could be one of many such discussions it may have to hold this year.

Infosys on Wednesday reported an almost 28.5% growth in net profit for the year ended March 2009 to Rs 5,988 crore, and said its revenues next year could fall 3.1-6.7% in US dollar terms, as the company seeks to cope with a lower demand in its top markets of the US and Europe.

The company forecast revenues of $4.35-4.52 billion for the year ending March 2010, down from around $4.6 billion the company reported for the year ended March 2009.

“The velocity of growth has slowed down, and the amount of uncertainty today is unprecedented,” said Infosys CEO & managing director S Gopalakrishnan. “While most of the contracts are worth $200-500 million at the beginning of discussions, they become smaller with the customers inviting more vendors (at least three) in order to get more competitive rates,” he added.

The country’s second-biggest software company expects billing rates to drop by as much as 6.5% this year, according to Infosys chief financial officer V Balakrishnan.

In a year when almost 69% of Infosys’ top customers have lowered their IT budgets, and more than half of them see a revival of economy only after March 2010, Infosys is preparing to cope with perhaps the worst recession it has witnessed in its almost three decades of existence.

“Discounts are being considered an investment in these challenging times, as vendors such as Infosys seek to retain their top customers over the long run,” a UK-based expert familiar with BT’s outsourcing decisions told ET on conditions of anonymity.

Experts such as James Friedman of Susquehanna International Group (SIG) say Infosys’ low revenue guidance reflects a shrinking outsourcing industry. “Between Accenture and Infosys, we are talking a ‘no growth’ situation-it seems that the demand environment is worsening because of challenges being faced by the top outsourcing customers,” he said.

At a time when top customers such as BT are attempting to lower costs by renegotiating outsourcing contracts, Infosys will find it challenging to sustain current pricing levels. The pricing for the quarter ended March 2009 declined by almost 3%, the company said. Infosys’ BT revenues could be down to almost $300 million, from around $380 million last year, according to an outsourcing expert who requested anonymity.

In a worsening economic environment, customers such as BT are also asking their vendors to give up on the premium rates for some of the niche projects, impacting average billing rates for the total outsourcing contract. Outsourcing customers are using the downturn as an opportunity to question high margins of Indian service providers.

Top five Indian software companies renegotiated almost $1.5 billion worth of outsourcing contracts since September last year at around 15% lower rates. Britain’s biggest phone firm is currently restructuring its BT Global Services (BTGS) unit, which accounts for almost half of Infosys’ BT revenues.

“BTGS’ performance could have a significant impact on Infosys’ growth expectations for FY10,” Diviya Nagarajan, an analyst at Mumbai-based JM Financial wrote in her report earlier this year. BT, which accounted for almost 9.1% of Infosys’ revenues last year, will contribute around 6.9% of the company’s business this year, down over 2%, Ms Nagarajan added.

“Infy will likely enjoy tailwinds from currency and abundant labor supply to fortress margins, and the unfortunate circumstances at Satyam may lead to customer conversion (Telstra has been in the headlines this week), but it may be hard to grow around potential declines in the top customers, and consequently, we are downgrading INFY shares to a Negative rating,” Mr Friedman added.

“Many of our clients are impacted by the financial crisis and are looking to us to help them reduce their expenses and optimize their businesses,” said S Gopalakrishnan, chief executive of Infosys. Infosys, which competes with MNC rivals such as IBM, Accenture and HP-EDS apart from other Indian tech firms including TCS and Wipro has increased the proportion of fixed price contracts in order to cope with pricing pressures.

The company had almost 35.4% of its projects being delivered under fixed-price model, up from around 31% a year ago. With around 1,04,850 employees by March 2009, Infosys also added 37 clients during the fourth quarter. The company reported revenues of Rs 21, 693, up 30% annually for the year ended March.

For Infosys, domestic software services market continues to show growth with several government and state-owned organisations seeking to award contracts of $3 billion. “We see a pipeline of almost $1 billion from the domestic market in the coming years-we are very serious about our India business,” added Mr Gopalakrishnan.

Source : http://economictimes.indiatimes.com/