Indian Outsourcing Companies: Eyeing the Peak

Indian technology outsourcing companies are no longer content to remain in the background but want to be in the lead.

Top Indian tech companies were long satisfied with doing software maintenance and database upgrading work for US and European firms like Citigroup Inc. and BT Group PLC (who were looking for cost effective solutions). But the Indian firms now want a larger share of the pie: they are broadening their services and want to compete for more advanced work which is usually outsourced to bigger, rival companies like International Business Machines Corp., Hewlett-Packard Co, or Accenture Ltd.

They are looking for a chance to run external data centers for customers which will help them expand into increasingly popular areas of “cloud computing”, a style of computing in which dynamically scalable resources are provided as a service over the Internet. They are attempting to combine these services into “end-to-end outsourcing packages” for clients as well.

Though Indian firms have tried for years to advance to the next level with their offshoring model, they are now under pressure to change their business format. The recession and increasing competition worldwide in the tech services industry has knocked down the annual 30% revenue growth they have been accustomed to. Annual export revenue growth in the outsourcing industry came down to 16% in the current financial year which ended in March. Industry experts, NASSCOM (The National Association of Software and Services Companies), predict a growth of only 4% to 7% this financial year. A company spokesperson from a Houston-based outsourcing advisory firm, TPI, says that India needs to really convert their businesses totally to continue to see the old growth range again.   

If Indian firms are able to progress to the next level, it could well be the deciding factor in determining if its outsourcing industry, which is currently at $58.8 billion, will remain just a back-office service provider to the technologically advanced Western firms or will see new areas of growth as well as be the rising star that it has been in the past decade.

India is under pressure because of many factors. Firstly, service providers who are based in the US have expanded their presences in India. Secondly, worldwide customers are scaling down their IT expansion plans and consolidating outsourcing vendors to decrease spending. Thirdly, competition in the form of cheaper offshoring alternatives is available from places like Philippines and Vietnam.

Industry experts say that India needs to be able to strike big deals like IBM did. IBM snagged deals in which companies like Australia’s Qantas Airways and J.P. Morgan Chase & Co. became part of their client list. For India to qualify for deals like these, she must hire more highly qualified experts in core fields like telecom, pharmaceuticals and credit derivatives, and must be open to changing the current business format.

Taking risks have never been India’s forte, but for big infrastructure outsourcing deals, there will be high costs and risks. Service providers must be ready to buy equipment for clients, take over their IT staff and take on the onus for reliability of remote data centers 24/7.

Such deals don’t work strictly on billing for the number of hours worked but rather, should be worked out in such a way that the service provider makes money only if the client sees profits. The profit margins can be lower, in the 15% to 20% range rather than on the 20% to 30% which has been the norm in the Indian software business.

A company official from top tech Indian company Infosys said that it’s not an easy job to take over the entire operations of a company’s IT related work. He says that the mindset required for running it and pricing it is very different and that the Company is still in the process of learning along the way. But things are changing for the better.

Among the largest Indian outsourcing firms, Wipro, the third biggest  in terms of sales after top dog Tata Consultancy Services and  Infosys recently clinched a deal with the Australian based Origin Energy to set in motion the overhauling of the company’s retail business operations. In 2007, Wipro bought Infocrossing Inc., a U.S. data-center management firm with expertise in health care.

With IBM striking an innovative deal with India’s largest telecom company to outsource everything from billing to network management to delivery of cellphone content like ringtones, a trend has been set for other companies to handle similar work. Tata Consultancy Services has won a contract to handle all IT infrastructure for Indian wireless startup Unitech Wireless, a joint venture of Unitech Ltd., a large Indian property developer and Norway’s Telenor ASA. The deal, worth almost $500 million, binds the Indian company’s revenue with the success of Unitech’s cellular network rollout.

Indian Company HCL won a major $350 million, seven-year contract with Reader’s Digest Association Inc. to manage the company’s network infrastructure and advise it on how to expand into digital media. The Company added that Reader’s Digest’s bankruptcy proceedings will not affect the contract. HCL also bought outsourcing specialist Control Point Solutions Inc. in 2008.

But India’s finding it hard to sustain her image as a low-cost service provider and has not been able to beat rivals on cheaper pricing when it comes to bigger, infrastructure heavy deals. A consultant with an India-based outsourcing advisory firm sums it all up to say that landmark deals like these will prepare the ground for Indian firms to test their ability globally to take on larger contracts in the future.

FYI…

Source: Wall Street Journal, October 5^th, 2009

Outsourcing Firms: Consolidation in India

A recent study by Gartner, an IT research and advisory firm predicts that more and more business process outsourcing (BPO) service providers in India will cease their operations because of the economic meltdown. At least 25% of the top service providers will find it difficult to sustain themselves and will not be an independent business by 2012.

The financial services sector, like those with substantial amounts of revenue from banking sectors, is first to be hit by the meltdown as this sector makes up almost one-third of the total BPO market, worldwide.

Gartner believes that buyers should be prepared. They should build exit strategies into contracts and have backup plans in the event of contracts; this has been the rising trend since 2007.

The entire scenario of business process outsourcing will change with market exits, acquisitions and the arrival of new vendors in the coming years. The economic crisis, unprofitable contracts and the inability to adapt to standardized delivery models will make it very difficult for most service providers to continue in their existing avatar. Where some outsourcing firms will be acquired, others will exit the market completely. Firms with new business models who will deliver business processing services as automated, utility services will take over.

Gartner is of the view that buyers’ vendor selection teams should study the prospective providers’ business deals or models to fully understand how they make their profits. It would be in their interests to become familiar with the vendor’s winning model of acquiring new businesses.

Source: The Economic Times, 30th September, 2009

FYI…

Indian IT on the High Road to Growth

The Hindu, dated September 4^th, 2009 published an article on NASSCOM (National Association of Software and Service Companies, India) expecting double-digit growth in IT exports.

Bigwigs in the business world met up at the e-Revolution-09 conclave in Chandigarh, where the theme was “Transforming Region: Harnessing Technology through Inclusive Growth”. Pramod Bhasin, Chairman of NASSCOM delivered the keynote address, where he laid emphasis on industrial growth along with increased employment and wealth creation.

NASSCOM foresees a growth of $225-300 billion in IT exports from India while employment is expected to grow from the current 4 million to a staggering 14 million in the next five years. But a stumbling block to the growth of the industry, he felt, was the lack of qualified manpower. Experts feel that currently only about 8-10 percent of qualified graduates are employable. An updated curriculum coupled with proper industrial training to hone their entrepreneurial skills and talent, they felt, would correct this situation.

The Governor of Punjab lauded the efforts by the Chandigarh administration in setting up the Entrepreneur Development Center to encourage and develop young talent and the setting up of an IT park to increase employment. About 30,000 new jobs are said to be in the offing by 2010. He appreciated the fact that the existing educational curriculum had also been modified to help train students become better entrepreneurs. He hoped these efforts would in turn help the development of the masses.

Mr. Bhasin said that Chandigarh, a tier-1 city, with its infrastructure and a safe environment, had the potential to become another Singapore and could beat Pune and Bangalore hollow in becoming the most sought after IT hub.

My take: India can be a frontrunner if it puts in a few obviously-needed improvements.

To growth in your business,