Europe that has historically been slow to open up to outsourcing and offshoring may soon emerge as the next big frontier for Indian IT services player with $45 billion potential outsourcing opportunity, said a report. Indian players Tata Consultancy Services (TCS), HCL Technologies and Tech Mahindra will have first-movers advantage due to their early investment in the region.
According to report by PhillipCapital, Germany and France continue to represent the largest potential with IT-spend potentials of $7.8 billion and $9.2 billion respectively. Companies from Italy, Spain, and Portugal continue to be reluctant to outsource due to rigid labour laws, language barriers, and negative mind set to offshoring. The total potential from Europe’s most outsourcing-friendly regions (UK, Scandinavia, Germany, France, Switzerland, and Benelux) is $30.4 billion (out of the total $45 billion).
“As the EU region grapples with declining demand and ailing economies, most companies there have been struggling to remain afloat. In times like these, peer pressure will be one of the most important factors that will push more companies towards outsourcing,” said Vibhor Singhal and Deepan Kapadia of PhillipCapital said in their report.
PhillipCapital had last year come out with a report that said that about 70 per cent of the 143 companies in the European Union-comprising top 10-12 by capex spend in each country across 20 countries and six verticals – revealed that 33 companies or 23 per cent have never outsourced their IT operations. Of the remaining 110 companies, 66 (46% of the total) have outsourced, but not offshored. Put together, 99 companies (70 per cent of the total) have not outsourced or offshored their IT operations – presenting a huge opportunity for Indian IT vendors.
In a follow up to the report PhillipCapital this year the analyst found that almost 60 per cent of the companies that have not outsourced/offshored their IT operations are doing badly (vs. peers who have outsourced). “While there might not be a causal relationship between the two, we believe that consistent underperformance will surely force these companies to do a relative analysis, which could throw up IT outsourcing as a major avenue for saving costs,” said Singhal and Kapadia.
The report further added that, 14 of the 30 companies that have never outsourced (47 per cent) are underperforming their sector peers. Similarly, 41 of the 63 companies (65 per cent) that have
outsourced but not offshored their IT operations are on weaker ground. Put together, 55 of the 93 (59 per cent) non-outsourcing/non-offshoring companies will be forced to consider IT outsourcing as a possible avenue to improve performance.
The highest share of non-outsourcer underperformers is in BFSI (71per cent) and E&U (84 per cent). All sectors, apart from retail and healthcare, have more than 50 per cent of the non-outsourcers underperforming their counterparts. We expect big data and mobility to drive outsourcing demand in the retail sector, said the report.
TCS, which has been among the few who has invested in Europe early on, has stated that Europe for the first quarter of FY16 will grow better than the company average.
Singhal and Kapadi in their report also said that their 2014 report was validated as in the last 12 months 36 large deals have been awarded form the region, and of which, 23 of them went to the Indian vendors. Of the 36 deals 17 were awarded by enterprises who outsourced and/or offshored for the first time. Nine were renewal deals while 27 were new contracts. Indian vendors bagged 23 while 13 went to MNCs (local/global) vendors such as IBM, Capgemini, and Atos Origin.
A secular trend has emerged over the last two years – Indian IT companies have begun capturing MNC players’ market share (from IBM and Accenture and local players such as Cap-Gemini and Atos Origin). Few examples of high-profile vendor substitution are: HCL Tech challenged MNCs (IBM and Capgemini) in contracts from DNB and Novartis and won. Infosys has recently siphoned out a large part of Daimler’s IMS contract with HP. TCS won IT outsourcing contract (first time offshoring company) inspite of the incumbents like Accenture and Sogeti.
So overall, almost all Indian vendors fared equally well in capturing deals. However, as the outsourcing fever catches on, we expect that the relatively stronger presence of TCS in the region will help it to grab a larger share of deals at the expense of others. HCL Tech should benefit from the surge in IMS deals from the region over the next few years. TechM should benefit from its strong presence in retail – a domain which offers one of the biggest IT outsourcing opportunities and where TechM has a strong presence (courtesy Satyam), said the report.
–Europe a $45bn opportunity
–Italy, France & Germany present the biggest opportunity with a total capex of $17bn
–Manufacturing & retail will drive the next wave of IT outsourcing with a capex of around $16.8bn
— Scandinavia, UK, France, and Benelux saw majority of first timers