IT Budgets Increasing; Outsourcing Doesn’t Keep Pace

September 15th, 2014 by Rahul Jain No comments »

I was surprised to hear that companies are increasingly inclined to invest in internal IT operations, including hiring more permanent staff, than to outsource tasks to off-premise providers. This information comes in the form of a survey and study conducted boutsourcing51y Computer Economics, a company well known for its analysis of the IT industry. When comparing outsourcing as a percentage of IT budgets, 2014 shows a lower percentage than any of the past five years. Spending on outsourcing is averaging 10.2 percent of total IT spending this year. That’s a slim decline from 10.6 percent in 2013 and a more weighty change from 2012 when it was measured at 11.9 percent of the total IT budget.

When examining specific IT functions within the 2014 time frame, Computer Economics reports fewer organizations are outsourcing help desk, desktop support, and application maintenance functions. Trends in outsourcing functions such as data center, application development, database administration, network operations, and disaster recovery are classified as being unchanged from a year ago.

Money spent on outsourcing is trending toward areas such as IT security work, Web operations, and software-as-a-service (SaaS).

The research company is also reporting the median IT operating budget has increased 2.4 percent in 2014.

“From a broad perspective, the most likely explanation for the downward tilt in outsourcing as a percentage of the total IT spending is the ongoing economic recovery,” said John Longwell, vice president of research for Computer Economics, who also noted IT outsourcing budgets are not necessarily shrinking so much as IT budgets are rising.

The analysis shows IT organizations are putting resources into internal operations at a pace that is greater than their spending with IT service providers.

Several findings from Computer Economics’ IT Outsourcing Statistics study provide interesting glimpses into IT inclinations. For instance, large organizations are spending 7.4 percent of their IT budgets on outsourcing at the median, compared with 6.1 percent for small organizations and 4.6 percent for midsize organizations.
Application hosting is the most frequently outsourced function in the study, and the fastest-growing type of outsourcing. The growing acceptance of software as a service gets most of the credit for this.

The outsourcing of disaster recovery, Web/e-commerce, data center operations, and network operations are identified as the functions delivering the best value in terms of saving money and improving service levels.

Organizations delegate business processes to outsourcing companies, such as managed service providers (MSPs) because they expect benefits related to decreasing their in-house labor costs and improving the quality of the outsourced item because the provider has core competencies (a knowledge base) in the chosen field, which also allows them to deliver faster service and more innovation. They view it as a better return on investment than the in-house option.

Disadvantages are not absent from this discussion. At the top of the list is the much-feared loss of control over the outsourced business processes, which, under the worst-case scenario, results in a decrease in the quality of a product or service and an angry customer contingent. Unrealistically high expectations that cannot be met are a malady in outsourcing, just as they sometimes are with in-house projects. There’s no known immunity for this. Employee morale can also be adversely affected by outsourcing decisions.

In the full study, which Computer Economics sells on its website, the outsourcing activity for eleven IT functions is inspected and interpreted. Those functions include: application development, application hosting, application maintenance, data center operations, database administration, desktop support, disaster recovery services, help desk services, IT security, network operations, and Web/e-commerce systems.


3,000 jobs lined up for Saudi women at outsourcing center

September 15th, 2014 by Rahul Jain No comments »

The first all-female business process outsourcing (BPO) service center in the Kingdom, which was inaugurated in Riyadh on Sunday, will aim to provide 3,000 local jobs to Saudi women in the next three years in line with nationalization efforts.outsourcing46

The BPO center was jointly opened by Saudi Aramco, General Electric (GE) and Indian IT services company, Tata Consultancy Services (TCS).
Aramco and GE were the first clients of the center, which spans 3,200 square meters.

Commerce and Industry Minister Tawfiq Al-Rabiah, Prince Saud bin Khalid, deputy governor of the Saudi Arabian General Investment Authority (SAGIA), Khalid Al-Falih, Saudi Aramco president and CEO, John Rice, GE’s vice chairman, Natarajan Chandrasekaran, CEO and managing director of TCS, and various dignitaries from government entities and business executives attended the official opening ceremony here.

Supported by the Human Resource Development Fund (HRDF), the center has begun operating with around 300 employees that have been trained in communication and presentation skills, corporate etiquette, global culture and basic computer programs, such as Microsoft Office and Excel.

About 100 of these new employees are fresh graduates, while the rest have two to three years of experience.

Fresh graduates were selected from educational institutions in the Saudi capital, including Princess Nora bint Abdulrahman University, the largest university for women in the world, King Saud University (KSU) and Imam University out of 1,200 candidates interviewed for the jobs.

Speaking at the inaugural ceremony, Al-Falih said: “Being the first all-female BPO service center in Saudi Arabia, this joint effort will bring significant value in diversifying the economy and society and will help address the challenge of creating jobs for talented and skilled female graduates by establishing a more diverse work force and boosting competitiveness.”

Echoing the sentiment, Rice observed: “The newly opened BPO center is proof of our commitment to support the Kingdom’s priorities around human capital development and the creation of employment opportunities for talented Saudi women.”

He described it as a new model for business customers to achieve higher operating efficiency in the Saudi market.

Expressing his delight, Chandrasekaran underlined, “skills, talent and technology converge here at the Kingdom’s first all-female BPO center, marking a new era for the information technology and BPO industry in the Kingdom.”

The center, which will undoubtedly reduce female unemployment rates (pegged at 34 percent in 2013), has already achieved a more than 70 percent nationalization rate.

The opening of the center was announced in September last year, with specialized services in finance, accounting, human resources, material supply and library services, in order to enhance operational efficiency for customers.


Westpac readies for outsourcing, hires Genpact

September 15th, 2014 by Rahul Jain No comments »

Westpac Banking Corporation has selected business process outsourcing giant Genpact to demonstrate its abilities to run human resources and back office services, as a precursor to plans to outsource work in the coming months.outsourcing45

The Australian Financial Review revealed in June that the bank had gone to market to seek proposals from outsourcing providers for more efficient back office functions for its HR operations. Genpact has been selected as the preferred supplier, after pitching against other existing Westpac suppliers Accenture and Infosys.

Sources with knowledge of the plans told the Financial Review that the bank has not yet signed a contract with Genpact for the wholesale outsourcing, but has instead agreed with the company that it will perform a trial to prove itself, with a view to ramping up the program should it prove successful.

Both Westpac and Genpact declined to comment on the agreement, but sources said the bank was looking to move quickly and jobs would soon be moved offshore.

It is understood Genpact will initially provide 50 staff to Westpac in areas related to learning and development, but that the company will also conduct a consultancy review of the HR function to look at what outsourcing would be possible more broadly.

Other services that could be outsourced include workforce administration, payroll functions, benefits administration and some technology systems to manage and analyse employee data.

The contract would represent a major win for Genpact, which was originally started as a business unit in General Electric in 1997. It has embarked on a plan to expand its presence in Australia, hiring more local staff and targeting the financial services sector.

When asked about the plan, independent outsourcing expert Mohit Sharma of Mindfields said it could prove to be a successful move for Westpac.

“If Westpac go with Genpact it is a rational choice as they have a consultative approach towards outsourcing, which is the most important evaluation parameter for the selection of a vendor for a sensitive process like HR,” Mr Sharma said. “Other Australian organsiations who have outsourced HR processes to pure HR vendors are struggling or not getting value beyond myopic cost arbitrage.”


Why TCS is betting again on Chandrasekaran

September 12th, 2014 by Rahul Jain No comments »

When N. Chandrasekaran was named chief executive officer (CEO) and managing director (MD) of Tata Consultancy Services Ltd (TCS) five years ago, analysts and insiders started talking of the firm’s acronym being short for “Take Chandra Seriously”.
Chandrasekaran proved them so right that no one was surprised when India’s largest software services exporter last week appointed the marathon runner CEO and MD for a second five-year term effective 6 October. Given his track record, shareholder approval to the appointment seems to be a mere formality.

In an industry where at least three big information technology (IT) firms—Infosys Ltd, Wipro Ltd, and Nasdaq-listed Cognizant Technology Solutions Corp.—have faced leadership challenges that have either affected, or threaten to affect, their fortunes, TCS’s numbers speak volumes for Chandrasekaran’s performance since he succeeded his mentor S. Ramadorai in 2009.

At $13.4 billion as of 31 March, TCS’s revenue made up a little more than 11% of the $118 billion IT industry. Its 305,431-strong workforce is a little over 10% of the number directly employed by the industry.

There’s more. Women composed 32.7% of its workforce as of 31 March, making it the largest employer of women among private sector companies. When the quarter ends on 30 September, the company will have easily surpassed the 100,000 women employee mark.

On Thursday, TCS’s market capitalization, at a little over $85.55 billion, almost equalled the combined $86.37 billion market cap of the next four biggest Indian IT firms—Infosys, Wipro, HCL Technologies Ltd and Tech Mahindra Ltd.

Cognizant, whose market cap is about $28 billion and is listed overseas, and US-based Accenture Plc, with a market cap of about $51.3 billion, aren’t in the list although most of their employees work out of India.

Chandrasekaran, who has been with TCS for almost 28 years, never applied for any other job. He started at TCS as a software programmer in 1987, having completed his master’s in computer applications from the Regional Engineering College, Tiruchirappalli (now National Institute of Technology, Trichy), in 1986. In the final year of his master’s programme, he took up a project with TCS, and never looked back, rising to the helm of the firm where he learnt the ropes of the IT business.

The transition was well-planned, say analysts. Chandrasekaran, they insist, was identified for the CEO’s role around 2004-05, but that became apparent only somewhere around 2007. When he eventually rose to the top at the age of 46, he became one of the youngest CEOs in the Tata group.

His rise in TCS was rapid. In 1999, he started the company’s e-business unit and expanded it to an over $500 million segment in four-and-a-half years. In September 2007, he was co-opted on the TCS board and named chief operating officer (COO).

As COO, he drove the company’s acquisition strategy—the purchase of Citigroup Global Services for $505 million in October 2008 is credited to him.

Under Chandrasekaran, TCS has consistently posted results that have beaten market expectations. The company does not provide quarterly or annual revenue forecasts, but it exceeded software industry lobby Nasscom’s 12-14% revenue projection for the year ended 31 March and is expected to easily beat the 13-15% revenue forecast for the current year.

Analysts expect Chandrasekaran to retain the growth momentum in his second innings. And TCS may soon become India’s first $100 billion market cap company as analysts from securities houses JPMorgan Chase and Co. and CLSA wrote in June when TCS’s market cap was about $61 billion. To be sure, that pales in comparison with the $190 billion market value of International Business Machines Corp. (IBM).

“While Chandra was expected to be re-elected for a second term, in his second innings we would expect him to foray deeper into new service lines like digital technologies, including social media, mobility, analytics and cloud (SMAC), and continue to outperform the industry, maintaining the 16-17% growth rate for the year that Chandra had earlier indicated,” said Dipen Shah, head of private client group research at Kotak Securities Ltd.

TCS is expected to hit $100 billion in market value soon, said an analyst from an international securities house who did not want to be named because he is not authorized to talk to the media.

“We are also expecting a possible merger or acquisition of a small digital enterprise, given that peers Infosys and Wipro have made many such digital acquisitions recently, although TCS hasn’t. Besides, TCS generally makes at least one small merger or acquisition every year, and the company is expecting digital to contribute significantly to revenue going forward,” said the analyst.

Rivals wane, challenges loom

Chandrasekaran’s first term at the helm coincided with a steady decline in the fortunes of Infosys and Wipro, its two closest rivals.

Once the bellwether of the Indian IT industry, Infosys got embroiled in leadership issues that took a toll on its profits. The firm will take time to recover under its new CEO Vishal Sikka, who took charge on 1 August. Wipro, under the leadership of T.K. Kurien, is also trying to rebuild.

Even Cognizant is showing chinks in its armour. On 6 August, Jennifer Hamel, an analyst at research firm TBR, noted that for the first time since the June quarter of 2011, Cognizant had not outpaced TCS in year-on-year revenue growth in the three months ended 30 June. In response to an unexpected dip in client spending, Cognizant pared its annual revenue growth forecast from 16.5% to 14% for 2014.

On 18 August, Mahesh Venkateswaran, the head of Cognizant’s $500 million SMAC business, stepped down. The 18-year veteran used to report to CEO Francisco D’Souza.

To be sure, TCS—and its rivals—does face its set of challenges.

Although automation has started taking over the traditional labour arbitrage lever for IT services delivery, TCS maintains a robust pace of hiring people (10% year-on-year in the quarter ended 30 June), mainly freshers, since it can keep employee costs low, said Bozhidar Hristov, an analyst with research firm TBR.

“However, hiring freshers in bulk could put pressure on TCS’s ability to deploy resources in timely manner, impacting its credibility and ability to maintain a competitive edge,” added Hrsitov.

And despite all the digital talk, traditional services continue to account for a major portion of the revenue of Indian IT firms, while SMAC technologies still account for less than 10% of the total revenue of IT companies.

Application, development and maintenance work alone accounts for 35-40% of the revenue of most IT firms. But with increased automation and platform-based services that can be replicated across segments and non-linear initiatives, analysts agree that SMAC will allow the IT industry to offer more value to clients.

Non-linear initiatives, unlike in the traditional model, are not dependent on the number of people engaged in a project for their revenues.

Much will depend on the ability of companies such as TCS to offer solutions that integrate new business models such as analytics and cloud-based services—which are part of SMAC—with traditional ones.

Scale is another issue TCS will have to deal with.

TCS has handled challenges related to size and scale very well, but in the future it will have to balance the need for linear, or headcount-related, growth with that of reducing costs through automation and by templating solutions that can be replicated across industries without the need to add additional labour. As TCS continues to grow, it will have to hire more laterals, or professionals, too, along with freshers to feed an increase in onsite project demand and the need for SMAC professionals. This will add to wage costs since the salaries of professionals, on average, start from Rs.7-10 lakh while freshers, on average, can be recruited for Rs.3-5 lakh.

Moreover, as TCS continues to expand in geographies other than the US, which include Europe, Continental Europe, Latin America, Japan, Africa and China to name a few, it will be forced to hire more local or onsite employees due to increasing pressure from those governments to hire locals. This will add to dollar costs and reduce its labour arbitrage, which it will have to compensate by more value-added work like digital, automation and templatization of solutions that can be replicated across industries—similar to what companies such as Accenture and IBM do.

Last, but not the least, if a proposed US immigration Bill gets passed in its current form, it will add to the wage costs of TCS and reduce its margins, analysts warn.

According to a 26 May note by research firm Offshore Insights, TCS employs about 27,000 staff in the US, of which 9,000 are US citizens and green-card holders. The rest are employed on H-1Bs and L-1 visas.

“Should the Bill (that limits the proportion of H-1B/L-1 Visa workers to 50% to that of US employees) gets passed in 2017, TCS’s US staff size would be estimated 35,000-36,000. This means it will need 18,000 US citizens which includes 9,000-10,000 new recruits. This doesn’t stop here; TCS will have to stop issuing any H-1Bs in coming two years. Clearly a huge hit, as constraints like talent acquisition, billing rates, margin pressures and similar others are bound to affect its operations onsite,” the note said.

Building for the future

The TCS management is not resting on past laurels.

TCS spent Rs.913.76 crore on research and development (R&D) and innovation in fiscal 2014 compared with Rs.776.58 crore in the year earlier, according to the company’s 2013-14 annual report. This is not much when compared with the billions of dollars that a company such as IBM spends on R&D, but sizeable given that TCS started out as an outsourcing firm that relied on low-cost labour in its home market to drive profits.

Till date, TCS has filed for 1,746 patents and 114 patents have been granted. The company opened its first R&D lab in 1981 when the technology industry in India was just taking shape. Across industries and services, TCS has established a global network of Innovation Labs. Its Co-Innovation Network has partnerships with academic institutions, start-ups and venture funds.

TCS has also invested significantly in digital technologies. It has invested in building a network of cloud data centres across the globe. The company has set up a digital enterprise unit in Silicon Valley to club its SMAC services, headed by Satya Ramaswamy, vice-president and global head of TCS Digital Enterprise, who joined TCS in 2010 after the company acquired Brightfon Inc., a mobile solutions firm he founded in July 2008.

Investments in digital initiatives are increasingly dictating “TCS’s go-to-market strategy as the company realizes that the pace of adoption of developing digitally enabled, vertical-specific portfolio is the key to remain competitive in the fast-evolving IT services market”, Hristov of TBR wrote in a 17 July report.

He added that to accelerate its portfolio and foothold expansion and offset potential margin pressure, “we expect TCS to pursue an acquisition of a Europe-centred technical consultancy with vertical-specific capabilities focus, as developing IP (intellectual property) through R&D can be more expensive and riskier than making an acquisition”.

Chandrasekaran earned compensation of Rs.18.68 crore in the year ended March, compared with Rs.11.7 crore the previous year. The pay excluded his earnings from the 88,528 shares he held in the firm as of 31 March.

The nearly 60% hike in Chandrasekaran’s annual salary in fiscal 2014 made him the highest-paid CEO in India’s IT industry. But in July, Infosys said it will pay Sikka $5.08 million in annual salary and stock options worth $2 million.

Judging from TCS’s performance in the past five years, Chandrasekaran, it appears, has earned his pay and his second term in office. At least for now.


Gislen to double head count in India

September 12th, 2014 by Rahul Jain No comments »

Swedish IT outsourcing firm Gislen Software is planning to double its head count in India to 100 from 50.outsourcing50

Founded in 1994, Gislen Software is focused on exports to Scandinavia. It has competence in areas such as public transportation and embedded systems, among others.

The firm has a facility at Madras Export Processing Zone near here, and has completed 20 years in India.

“We have grown from a 3-people start-up into an agile company focused on niche applications in the past 20 years,” Mikael Gislen, Managing Director and majority stake holder of Gislen Software, said.

The company counts TNS, ABB, SKF, Scandinavian Airlines, Swedish Match and PostNord as its top clients.

Mr. Gislen said the firm’s current facility could house 80 people, and it would be looking at an extra facility within MEPZ or in the neighbourhood.

Mr. Gislen also said that low attrition had also helped the company.


Very Few CIOs Concerned by Risks of Outsourcing IT

September 12th, 2014 by Rahul Jain No comments »

More than 75% of IT executives in the U.S. corporate world believe that their company’s decision to outsource IT infrastructure services will have no impact on their careers.outsourcing43

This was one of the findings of a recent survey of 1,014 IT executives in U.S. businesses by Information Week.

Only 3% of executives fear that outsourcing would lead to their dismissal, while a similar number of executives feel worried that they could be relocated as a result of such a decision. On the contrary, 19% of executives believe that their responsibilities will be expanded as a result of outsourcing.

Across North America, according to another survey from Information Week, businesses have continued to struggle to implement information technology, largely due to a lack of human skills and budget.

“CIOs pay top dollar for namebrand technology and believe it’s generally worth it because they do have limited staff and that staff has specific but limited expertise,” the report said.

Many CIOs surveyed for the report expressed concern that IT leadership would slip out of their hands because the decision for IT procurement typically comes from business units.

The swiftly advancing technology world has offered businesses with several alternatives to their in-house IT infrastructure: Software-as-a-Service, Infrastructure-as-a-Service, and other Cloud-based offerings.

“The bottom line, though, is that IT leaders need to change their outlook and tactics, and embrace today as a time of golden opportunity. They need to borrow tactics and strategies from digital-native businesses, and adapt them to their needs, to create an infrastructure that’s as responsive as the company demands,” the report noted.

With businesses increasingly aware of the need to adapt technology to stay one step ahead of their competitors, IT budgets are ballooning more than ever, with the majority of CIOs surveyed talking of increasing their IT budgets.


Virtusa Named a Major Contender in Everest Group’s PEAK Matrix for IT Outsourcing in Banking and Financial Services

September 12th, 2014 by Rahul Jain No comments »

Virtusa Corporation  VRTU, -0.14% a global IT services company that combines innovation, technology leadership and industry solutions to transform the customer experience, today announced that it has been named a “Major Contender” in Everest Group’s PEAK Matrix™ for IT Outsourcing in Banking and Financial Services. Virtusa was recognized, for the second consecutive year, as a key global player, leveraging unique technology solutions to drive innovation in the industry. Additionally, Virtusa was recognized as a “Star Performer” based on its relative year-on-year movement on the PEAK Matrix.outsourcing49

“We are very pleased to be named a Major Contender and Star Performer in the Everest PEAK Matrix for Banking AO,” said Vasan Srinivasan, senior vice president, Banking and Financial Services at Virtusa. “We continue to build our roster of clients, which includes some of the world’s largest banking and financial institutions and large regional players. Increasingly, these organizations are drawn to Virtusa because of our in-depth understanding of the three-fold challenges faced by financial institutions and our solutions to address these challenges – managing new risk and compliance mandates, reducing business-as-usual (BAU) costs, and improving customer acquisition and service in the new digital world by providing distinctive millennial experiences. As the banking and financial services industry continues to evolve, it’s both humbling and gratifying to be recognized as a key player driving the industry forward.”

Virtusa was recognized not only for servicing some of the world’s largest banking and financial institutions, but also for having a unique execution capability model that stands out in a very crowded supplier market segment. Using its global delivery model and platforming approach, Virtusa delivers accelerated business solutions to its clients, enabling them to rapidly evolve their products and services and improve customer experience. The company was also recognized for its focus on millennial enablement and leveraging mobile and social technologies.

“Virtusa continues to be recognized by banking clients for its robust delivery mechanisms for transformational projects, strong industry partnerships, and continued focus on innovative solutions,” said Rajat Juneja, Practice Director, BFSI IT Services, Everest Group. “Virtusa also augmented its capabilities in this space through new acquisitions, and by developing unique propositions for select banking areas such as payments etc. The provider has consequently witnessed strong growth in its deal activity and has been awarded a Star Performer rating in our 2014 Banking AO PEAK Assessment.”

Developed by Everest Group, a global consulting and research firm, the PEAK (Performance, Experience, Ability, Knowledge) Matrix is a framework that assesses the relative market success and overall capability of service providers in various industries. This particular PEAK Matrix positions the world’s leading banking AO market leaders based on performance, experience, ability and knowledge. Service providers undergo a rigorous assessment and are positioned on the PEAK Matrix based on evaluation across two key dimensions including market success – measured by the number, scale and growth of large banking AO contracts, and delivery capability – measured by scale of operations, scope, enabling domain investments, delivery footprint and buyer satisfaction. The results were published in Everest Group’s report IT Outsourcing in Banking – Service Provider Landscape with PEAK Matrix™ Assessment 2014.

Virtusa’s Global Financial Services Consulting Group provides end-to-end consulting, and technology and transformation services for the financial services industry worldwide including banks, broker dealers, fund administrators, investment banks, investment managers, credit card, payment providers and select industry service providers. Virtusa’s banking and financial services customers include 5 of the top 10 U.S. banks, 4 of the top 15 global banks, some of the top brokerage firms and several of the largest card and payment providers.


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