Indian Banks and Insurance Companies Squeeze IT Vendors

During the preceding months of 2009, when the growth of healthy companies outside India had slowed to around three or four percent annually, Indian IT companies were clocking up eight to ten percent. Why weren’t they hit as badly by the global recession? Because they turned their sights on the Indian market and, to their delight, discovered salubrious springs of business there. LARGE springs.

The Indian banks and insurance companies were major sources of the warm, mineral-rich water that the IT companies were relaxing in while the rest of the world moaned. But it seems that after a while, those same banks and insurance companies got wind of how important they were to the health of the IT companies, and they decided to leverage this.

The Indian banks and insurance companies are now knocking on the IT companies’ doors with a smile on their face saying, “Seeing that we’re giving you all this business and keeping you well-fed, and that without us you’d be up the you-know-what creek without a paddle, maybe you wouldn’t mind re-negotiating our contracts worth $800 million to provide one hell of a more services for the same money. If you say no, you might regret it.”

Knowing how things go in India, the IT cos will join their palms in a namaste, touch the feet of the clients and murmur, “Whatever you say… you are our friend, philosopher and guide.”

Let’s see how it pans out… I’ll keep you posted.

Cheers,

source: livemint.com

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Outsourcing: Who Moved My Market?

With the economic meltdown making US consumers cut back on costs, there’s been a paradigm shift in the way American firms and multinationals are looking at fast developing countries like China, India and Brazil. They are not looking at these countries as mass producers of low-cost goods and services, but are now looking at them as potential customers. This could signal the beginning of a new phase in the US economy where the emphasis is less on US consumers and more on places like China where the consumer now has more money to spend.

The local markets of advanced nations appear small as compared to the potential markets in nations like China, India and Brazil where the combined population would be in the vicinity of 2.5 billion people who are younger and willing to spend as compared to the smaller but older populace of Western Europe, Japan and the U.S.

According to experts, Brazil is likely to help Latin America out of recession. Though many nations globally are still in the grip of the economic crisis, the Brazilian economy is likely to grow by 4% to 6% next year. Rio de Janeiro being chosen as the venue for the 2016 Olympics is seen as significant in helping the economy recover faster.

But whether this helps increase employment and investments in the U.S. is still not very clear. The fact that there is increasing American investment for production near emerging economies in lieu of shipping goods from US facilities overseas, means Americans are definitely looking at profits from those emerging markets.

The U.S. is definitely trying to boost its economy by increasing exports just as they have in the past. Had it not been for overseas customers, a small construction-equipment firm like Power Curbers Inc. near Salisbury, N.C., would have gone under during the meltdown.

They were lucky that infrastructure development was going on in other countries, as almost 75% of the sales were international as compared to the 25% just two years back, said the president of Power Curbers Inc.

Companies like General Electric Co. say that advanced nations like the U.S. are relying heavily on new economies. The GE chairman said that to be able to sustain the balance in the shift of consumption power from “wealthy nations to emerging giants” there has to be a different business format for a company like his to succeed. With a growing market in heavily populated countries like China and India, the old business format of developing products at home and distributing them globally will no longer be relevant, he said in the October issue of Harvard Business Review. He added that more power needs to be placed in the hands of the local people of these countries and their views taken on designing, building and marketing the products.

Though he did not refer to the implications of this on American employment figures, the trend is clearly visible from the company’s annual reports. The report quotes that GE, in 2004, had 165,000 employees in the US and 142,000 employees outside. But last year the figures were: 152,000 employees in the US and 171,000 outside. This clearly indicates growing US investment overseas. But it’s also likely to revive old issues like the outsourcing downside as well as US tax and currency policies that encourage outsourcing.

Source: Chicago Tribune, October 6^th, 2009

FYI

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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

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