In-sourcing of IT operations gains traction

October 24th, 2014 by Rahul Jain No comments »

“There has been shift towards in-sourcing by U.S. firms over the past three years in the manufacturing sector and also in specific areas of high intellectual property value in companies.”Outsourcing40

In a reversal of trend, major firms are now looking to move back their information technology functions in-house or what is termed as in-sourcing, from their earlier stance of outsourcing to low-cost providers in India.

Firms such as auto major General Motors, Target, Zynga, Nordea and AstraZeneca have looked to build their own information technology team.

“There has been shift towards in-sourcing by U.S. firms over the past three years in the manufacturing sector and also in specific areas of high intellectual property value in companies. The desire has been to keep vital IP and know-how within the company,” said Mary E. Shacklett, President, Transworld Data, a technology analytics, market research and consulting firm.

British-Swedish pharma major AstraZeneca is looking to bring down its IT outsourcing to 30 per cent in the next three years from 70 per cent now. It works with eight vendors, out of those HCL Technologies mainly handles infrastructure, while Cognizant, Infosys and Accenture do application development and maintenance.

The company’s global IT budget is roughly $1.3 billion, which it aims to halve in the coming years. “In-sourcing is a silent trend. Companies like General Motors are on it for the last three years. This is unlike the earlier outsourcing trend, which had people shouting from rooftops. So, nobody is talking about ‘in-sourcing,’ at least not yet,” David Smoley, Chief Information Officer, AstraZeneca, said. The firm has launched is own captive arm in Chennai which will handle in-house IT work and support its 51,500 employees worldwide.

In 2012, General Motors Chief Information Officer Rondy Mott embarked on a plan to bring back its IT work inwards. At that time, 90 per cent of General Motor’s IT services where provided by Helwett-Packard/EDS, IBM, Capgemini and Wipro and only 10 per cent was in- house. The plan is to reverse this ratio in three years. Mr. Mott is of the view that GM cannot be creative or fast enough with outsourced IT.

When contacted, a GM spokesperson said, “All we can confirm at this point is that GM IT’s in-sourcing strategy is on track”.

AstraZeneca’s Mr. Smoley said that one of the reasons why his firm looked at in-sourcing was to take control from an IT prospective and to improve efficiency in terms of faster delivery of drugs.

Research firm Gartner said it was seeing a fundamental shift in the approach to digital business causing organizations to rethink their approaches to sourcing. “The threat many Indian providers will face is from the shift happening from labour to technology arbitrage. How quickly Indian providers can change gears to grab the opportunity and move forward even if that means constructive destruction of some of the existing business models could define future success,” D.D. Mishra, research director at Gartner, said.

“The shift to captives represents a long-term commitment to offshore-based services. Overall, companies in Europe and the U.S. are looking to perform more work offshore in India, not less. Captives are not a threat for vendors, but, in the short-term, can cannibalize a vendor’s business,” said Peter Schumacher, President and Chief Executive of Germany-based consulting firm Value Leadership Group Inc. “Offshore services firms with strategic vendor status, and those that are organizationally agile and collaborative, are likely to be least impacted – some may even benefit.”


Shell Seizes The Moment And Moves 75% of IT Infrastructure To The Cloud

October 24th, 2014 by Rahul Jain No comments »

Oil giant Shell has decided to embrace cloud computing. The firm has revealed a major overhaul of its IT infrastructure, with 75% being migrated to the cloud, tech news site V3 reports.Outsourcing39

Shell’s enterprise product manager Oskar Brink made the revelation on Tuesday at the AWS Enterprise Summit in London, where he admitted that the decision to shift to the cloud had taken a lot of persuasion of the firm’s corporate stakeholders.

He spoke of the advantages of the cloud in helping control the cost, risk and agility of Shell’s IT environment, which consists of up to 10,000 applications.

He also talked of how expensive the portfolio is to manage and went on to explain: “Moving the infrastructure pieces into the cloud helps us to get [costs] more under control. We’re moving into the cloud as much as we can.”

One of the advantages is the flexibility cloud services offer. This has helped Shell reduce costs by allowing it to use on-demand services whenever they’re required, rather than being a continuous part of its internal infrastructure.

Brink added: “We look at the cloud as an off/on capability – actually we say off rather than on. What we don’t use we turn off, we don’t pay for it. That’s what we’re trying to achieve in [our] portfolio.”

Shell began outsourcing to virtualised services back in 2008, when 25% was migrated to the cloud. To reach the point where three-quarters of its infrastructure is located there, it took a lot of effort to overcome scepticism from the company’s IT chiefs and stakeholders – Brink likened it to “turning a tanker ship”

Still, it’s not the first time the company has shown that it is willing to move with the times – last year, it revealed plans to support 135,000 mobile devices in a BYOD strategy.


Cuisia woos American BPO firms

October 24th, 2014 by Rahul Jain No comments »

Philippine Ambassador to the US Jose Cuisia urged the American information technology and business process management industry to consider the Philippines an ideal location for customer service and technical support outsourcing.Outsourcing39

“The IT-BPM industry has been the fastest-growing industry in the Philippines in the last 10 years,” he told  business executives and decision makers from Wall Street and Fortune 500 firms, who attended a networking event hosted by the Philippine Consulate General in New York and the Seven Seven Corporate Group in the US.

Cuisia in a statement stressed the 6.4-percent economic growth in the second quarter of 2014, urging executives from New York, New Jersey and Connecticut to seriously consider putting some of their investments in the Philippines.

Philippine Consul General Mario de Leon noted that the IT-BPO industry directly employed one million Filipinos and was expected to earn $18 billion this year.

He added the industry also supported 2.5 additional jobs for each direct hire.

“The Philippines, now recognized as the number one provider of voice services, is determined to increase its market share for more sophisticated outsourced operations in such areas as financial services, software design, medical and legal transcription, animation and gaming,” De Leon said.

The report noted that by 2016, the Philippine business process management industry was expected to expand further with projected revenues of $25 billion and direct employment for 1.3 million people, accounting for 7.8 percent of the Philippine gross domestic product.


Lufthansa close to deal with IBM for IT infrastructure unit

October 24th, 2014 by Rahul Jain No comments »

German airline Lufthansa is close to a deal to sell its IT infrastructure unit to IBM (IBM.N), including an outsourcing agreement for the services, as part of a shake-up of its technology activities, it said on Wednesday.Outsourcing38

Europe’s largest airline by revenue is undergoing restructuring and cost-cutting efforts to better position itself to compete with low-cost carriers and Gulf rivals.

It earlier this year said it was seeking a buyer for the unit, which provides data centers, networks and telephony, because it requires a high level of investment and economies of scale, which the airline could not provide.

Under the planned deal, Lufthansa will outsource all of its IT infrastructure services to IBM under a seven-year deal and the U.S. firm will take over the airline’s IT infrastructure division, currently part of Lufthansa Systems.

The partnership announcement comes two days after IBM, a company undergoing a stark transition of its own, shocked the markets with lower quarterly results and by suspending its full-year forecasts.

IBM, now largely a computer services supplier, said it suffered a marked slowdown in September as many customers stopped buying new services due in part to macroeconomic concerns but also the rapid pace of changing client demand for the latest technologies delivered as Internet-based services.

Lufthansa shares rose 2.6 percent in early trading, the top gainer among German blue-chips .GDAXI, as analysts welcomed the progress in the restructuring of the division,

The deal will result in a one-off pre-tax charge of 240 million euros for Lufthansa, which will not impact its operating result for 2014. It will allow Lufthansa to reduce its annual IT costs by around 70 million euros a year.

A final price for the sale is still being negotiated, a spokeswoman told Reuters.

The sale is part of plans to reorganize the Lufthansa Systems business into three parts – Infrastructure, Airline Solutions and Industry Solutions, with the latter two to be kept within the Lufthansa group as independent companies.

The infrastructure business, which employs 1,400 people, accounted for 40 percent of Systems’ total turnover of 640 million euros ($883.45 million) in 2013 but it made up only 25 percent of the unit’s profit.

The Lufthansa Systems restructuring is expected to be complete in the first quarter of 2015, with the deal to sell the IT infrastructure unit due to complete by March 31, 2015.


Indian IT firms expected to be more acquisitive going forward: Peter Bendor-Samuel

October 24th, 2014 by Rahul Jain No comments »

Peter Bendor-Samuel,  founder & CEO of management consulting and advisory firm Everest Group is one of the few global consultants who have been watching the Indian IT outsourcing landscape quite closely. In an interview with Bibhu Ranjan Mishra , he talks about how the Indian IT services firms have now reached a level of maturity when they are expected to be more acquisitive. He also talks about how Tata Consultancy Services (TCS) has been able to differentiate itself from rest of the pack backed by consistency in strategy and execution. Edited excerpts:Outsourcing37

Recently we saw Cognizant, an offshore-centric IT services company showing rare aggression BY acquiring US-based healthcare solutions provider TriZetto for a whopping $2.7 billion. What does it mean for Indian IT services companies?

It (Cognizant’s acquisition of TriZetto) is really going to change the competitive dynamics. But there is no doubt that companies like Infosys and TCS can do it because they have got great balancesheets to do these kinds of things. My guess is they will (do it). This is time for the industry to consolidate and this is an appropriate time for Indian heritage firms to step up their inorganic growth pursuits.

You have been tracking the Indian IT services companies quite closely for long. Are you seeing any change in the way these companies operate now as compared to few years ago?

Clearly, the Indian IT services majors are a matured lot now. They have got much more seasoned leadership. Look at TCS; it has a very seasoned and matured leadership team, very strategic in operation. They are riding a huge wave. They are running down the hill. I can say that no one else at the moment has that kind of capability. The next step for them is to be acquisitive.

How has TCS managed to leapfrog the rest of the peers?

For TCS, much has to do with their leadership team. From the early days when they were about an in-ward focused company, TCS was among the earliest ones to take a customer-centric view. TCS thought about value to clients whereas Infosys continued to focus on maintaining high margin. So, TCS was more forward looking and more consistent in their approach. I think Infosys struggled with that. They (Infosys) were too much focused on growth and profits, and customers did not agree.

But TCS has now improved its profit margins to one of the industry leading?

That’s true. But just think how they are doing it? From the very beginning, Infosys was focused on making a margin play whereas TCS became a low cost producer. They (TCS) drove huge investments in labour pyramid to make it flatter and more efficient. They invested more in automation and productivity tools. I think the other aspect is, in this business scale helps. So TCS was able to benefit from the scale advantage. It is particularly important in two aspects. They were able to get large wallet share in big clients while they were able to price lower than Infosys.

With Vishal Sikka at the helm, people say perhaps Infosys is going to make a much larger product play now that before. What is your view?

I think they will unlikely do so at this stage of their services business. They have to do significant intellectual property (IP) acquisition. Infosys has a huge capacity to do that. They have got a great balance sheet and the right structure. They have got a separate organisation which they can run differently for products. I like that structure. Putting the investment to the product side makes a lot of sense. I think that will be a very attractive strategy to look for.

What are the key changes that you are seeing at Infosys after the joining of Vishal Sikka?

I think he is still trying to have the feet on the ground. He has met many clients. But these are still early days. I think his next step will be get talents. I won’t be surprised if he does not get talents from outside. It is not that Infosys does not have enough of them inside, but more so to drive the kind of changes he wants to. I would encourage him to bring in non-Indian talents. Infosys needs to do with multi-cultural aspects as it is very Indian-centric now.

What are your view about Wipro and HCL Technologies?

There is no doubt that Wipro has become a much aggressive company, led by T K Kurien. Wipro is competing in the multi-tower transactions in domains which used to be the focus of companies like IBM and Accenture earlier. So, they are certainly seeing a lot of momentum right now. As far as HCL is concerned, while they are very much focused on infrastructure services, they need to strengthen their applications and BPO offerings.

Beyond these four companies, any other companies that come to your mind who can be the challenger in the IT services space?

The guy you should keep an eye on is Virtusa – they are very aggressive, very strong in digital; they are quite well-positioned to take advantage of the new technologies. They are growing very fast. So also is Syntel; they are growing very fast backed by a very aggressive management team. Syntel’s success lies in their ability in turning some key accounts to very large accounts. Then there are companies like Mindtree, but I think they have really to figure out how to differentiate in a market where scale really matters.


Wipro plunges over 4% as Q2 results disappoints Street

October 24th, 2014 by Rahul Jain No comments »

Shares of WiproBSE -3.60 % plunged over 4 per cent as the market opened for Samvat 2071 muhurat trading as the Street was disappointed with its second quarter results.Outsourcing36
The company reported a consolidated net profit of Rs 2,085 crore during July-September quarter, down 0.9 per cent, against Rs 2,103.2 crore in previous quarter.

Sales in during the quarter increased to Rs 11,816 crore, up 12.4 per cent, from Rs 10,508.3 crore, QoQ.

The company sees Q3 IT services revenues at $1,808-1,842 million. Q2 EBIT margins stood at 22 per cent vs 22.8 per cent, QoQ.

“Wipro reported weaker than expected performance for Q2FY15, with revenue and margin missing the expectation. Moreover, the guidance was softer than PLe/Consensus expectation. Management is still confident of improving growth momentum in H2FY15 on the back of large deal wins. Moreover, return of discretionary spend in the US and Outsourcing penetration in Continental Europe makes demand outlook healthier,” said Prabhudas Lilladher report.

The brokerage has revised its target price to Rs 650.

“We see improvement in the win rate to drive revenue momentum in CY15, along with available margin levers that would accelerate earnings momentum. However, we see near term weakness in stock due to weaker than expected guidance,” the report added.

At 06:30 p.m.; the stock was at Rs 557.60, down 4.14 per cent, on the BSE. It fell 4.7 per cent intraday to touch a low of Rs 554.30.


Wipro Sees Rosier End to Year as US Clients Spend

October 24th, 2014 by Rahul Jain No comments »

India’s third-biggest software services firm Wipro Ltd , under pressure to improve lacklustre sales growth, said it saw a rosier end to the year as more confident US clients increase spending.Outsourcing35
Wipro, which provides outsourcing services for big-name clients such as US bank Citigroup, posted an 8 percent increase in second-quarter net profit on Wednesday, narrowly missing expectations. It said it continued to face “headwinds” in key accounts, particularly European clients.

But chief executive TK Kurien, appointed in 2011 to turn around the technology firm, said there were improvements ahead as discretionary spending returns in North America.

“We expect the revenue to come back in quarter four of this year or maximum quarter one next year,” Kurien told reporters. “But it will come back.”

For the quarter ended Sept. 30, Bangalore-based Wipro posted consolidated net profit of 20.85 billion rupees ($340.4 million). Analysts, on average, were expecting Wipro to make 21.09 billion rupees, according to Thomson Reuters I/B/E/S.

Total revenue rose to 118.16 billion rupees from 109.91 billion rupees in the same period last year.

“Overall the demand environment continues to hold steady. In North America we see discretionary spend returning,” Kurien said. He added the group saw opportunities in continental Europe, where outsourcing has yet to expand to US levels.

Wipro added 50 new customers during the quarter.

Kurien was picked to lead the company more than three years ago by founder chairman Azim Premji, after Premji sacked joint CEOs Suresh Vaswani and Girish Paranjpe.

Wipro, however, has struggled to catch up with rivals such as Tata Consultancy Services and Cognizant Technology . Peer Infosys has itself been hit by management changes over the last couple of years, but has reassured investors with a new chief executive. [ID:nL3N0S51OA]

“Infosys has now laid out their plans, so we know what the idea is. Wipro has talked about plans for some time, but it does not show on results,” Ankita Somani, analyst with MSFL Research said.

Wipro said it expected revenues from its IT services business to be in the range of $1.81 billion to $1.84 billion in the current quarter. For thee quarter ended Sept., the unit saw revenues of $1.77 billion.

Shares in Wipro closed ahead of the results at 583.65 rupees on Wednesday in the Mumbai market.


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