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…

Outsourcing: Where India, China and Vietnam Are Going

BusinessWeek published an article dated 25th September, 2009 about the world’s outsourcing market being worth $373 billion.

The new Canadian research firm, XMB Global, predicts India and China as the leading outsourcing countries with a growing market of 14.4% this year, with India generating revenues of US$48 billion and China at US$28 billion.

Vincent Altez, a senior analyst at XMG says that the dynamics of global sourcing will undergo a sea change in 2010 because of various factors.

In his report he says that India will snag 44.8 percent of the global market with China following closely behind with 25.9 percent. But the growth is expected to remain more or less the same as that of 2008 with no significant growth because of Satyam Computer Services’ financial debacle and demand paving the way for other offshore countries. Altez in his report said that recession “has provided the opportunity to rationalize and shift work to other offshore destinations other than India”.

According to the XMG report, the Philippines is responsible for 6.9 percent of the total offshore revenue which is more than its 6.7 percent revenue generated in 2008. The Philippines has registered revenue of US$7.3 billion at the end of the year which makes it the third-best performing destination with revenue growing at 21.7 percent. The figure is perhaps less than the expected 24 percent because of indifferent demand due to slow growth for IT services and with key players like India and China delaying their expansion plans.

Though the worldwide growth graph this year at 14.4 percent will be lesser than last year’s 19 percent, it is still seen as positive because the expansion in the industry is in spite of the recession. Altez in his report noted that offshoring and outsourcing is “part of a natural ongoing economic revolution notwithstanding a financial crisis”.

Altez says that the economic recovery of Europe and the United States, as well as the Chinese and Vietnamese governments’ determination to attract foreign investors, will have a hand in changing the dynamics of global sourcing in 2010.

Outsourcing: Chinese Sops For Competing with India

China has brought out a set of policy measures to help the growth of outsourcing industries as the government felt that the existing growth model, which has been in place for the past 30 years, needed to be revamped. The old model of manufacturing and exporting to consumers in the developed economies, China feels, is not working for them anymore. They feel the economy needs to be reorganized and restructured with emphasis on domestic consumption and look into newer areas for growth, which includes outsourcing of software and back-office services.

China’s aim is to hasten the growth of the outsourcing industry in an effort to take on India, which is at present the undisputed leader when it comes to providing outsourcing services. Towards this end, the commerce ministry signed a memorandum this week with 22 leading multinational corporations which include Coca-Cola, Sony and Kodak. They hope to attract 200 more multinational companies from Fortune 500 companies to outsource to China by 2013.

The deputy chief of the foreign investment department, Lin Zheying at China’s commerce ministry, says that the government has taken up an initiative of hosting preferential policies to give a boost to the growth of the outsourcing industry since the beginning of this year. One of the policies China has initiated is that of offering financial aid to companies.

The government pledged support from financial institutions in the form of equity and debt financing to Chinese outsourcing service providers as part of this new policy. Banks have been advised to think of ground-breaking credit products which are aimed at the outsourcing business especially for companies in 20 “pilot cities” which include Beijing, Shangai, Tianjin and Chongqing.

Other service providers who meet the criteria have also been promised support to get themselves listed on domestic and overseas stock exchanges. Policy makers from banks and insurance companies also issued guidelines inviting social funds, venture capitalists and equity funds to help the growth of the outsourcing industry with credit and equity investments.

A researcher, Wu Jinglian, at the Development Research Centre of the State Council says that China has the capability to beat India when it comes to outsourcing. Reports from the Global Outsourcing Report, which ranks countries based on their opportunities, costs and risks in relation to IT outsourcing, say that China, now in second place, will take over the No.1 slot from India by 2015.

China’s soaring ambitions are backed by good planning. The government’s current Five-Year Plan is geared to encourage a 1000 large and medium-sized service outsourcing ventures. At last count in June, China had more than 6,600 outsourcing service providers with over 1.2 million employees. With the government wanting a growth of $30 billion by 2013, deputy chief Lin believes that the new preferential policies which include tax incentives, employment subsidies and a labor management system can help service providers and eventually help the government meet its target.

Source: dnaindia.com September 13^th, 2009