The market for Indian outsourcers is on the mend, but these companies will have to build expertise in new technology areas, and set up operations in multiple locations to take advantage of market conditions, according to analysts.

A number of new large deals are expected to be signed by the second quarter of this year, Sudin Apte, principal analyst at Forrester Research, said on Wednesday. Indian companies are however not likely to achieve soon the revenue growth levels they had before the recession, he said.

By a rough estimate, the maximum revenue growth Indian companies could reach by March 31, 2011, the end of the next Indian fiscal year, would be about 15 to 17 percent, Apte said. Top Indian outsourcing companies like Infosys Technologies and Tata Consultancy Services (TCS) posted revenue growth rates of over 30 percent in the fiscal year to March 31, 2008.

An indication of the turnaround came from Infosys, India’s second largest outsourcer. The company said on Tuesday that its revenue for the quarter ended Dec. 31 had grown by 5.2 percent in U.S. dollar terms compared to the same quarter in the previous year. Profit growth was however flat at 0.6 percent.

Infosys had posted a decline in revenue and profits in the previous quarter. On Tuesday the company also revised upwards its outlook for the current fiscal year ending March 31.

Tata and Wipro are also expected to announce an improvement in their revenue and increased hiring of staff later this month when they announce their results for the quarter ended Dec 31.

The current quarter is likely to be better than the last one for Indian outsourcers, said Diptarup Chakraborti, principal research analyst at Gartner.

The pick-up in business so far has mainly come from necessary or maintenance expenditure rather than discretionary expenditure on IT, Chakraborti said. Some of the maintenance expenditure had been prioritized, and the rest cut during the recession, he said.

Business from discretionary expenditure is likely to come only by the middle of the year, Chakraborti added.

There are also large opportunities ahead for Indian outsourcers in the domestic market, according to Chakraborti. The Indian market is forecast to grow by 19 percent in 2010 to around US$8 billion, he added.

Both Gartner and Forrester have forecast a pick-up in IT spending this year. Global IT spending, which dropped 8.9 percent last year, will rise 8.1 percent in 2010 to more than $1.6 trillion (T), Forrester said Tuesday. Purchases of IT consulting and systems integration services will grow by 6.8 percent in U.S. dollar terms, while IT outsourcing services will be 7.1 percent higher, it added.

As spending on IT increases, there will be more opportunities for Indian outsourcing companies, Chakraborti said.

India will be a preferred location as customers in the U.S. and Europe look to cut costs, said Apte. But Indian companies will have to be willing to explore a variety of engagement and pricing models with the customer, he added.

To take advantage of upcoming opportunities, Indian companies will also have to invest in a variety of new technologies like cloud computing and green computing, said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International (TPI). Customers will expect their providers to be able to help them make the transition to the new technologies, he added.

The cloud computing trend will also determine how outsourcers will deliver services to customers, throwing up new business models, Pai said.

Indian outsourcers will also have to start looking like global companies with the ability to service their clients from multiple locations, according to Pai.

These companies will also face increasing competition from multinational services companies like IBM and Accenture that have set up operations in India to tap low-cost talent in the country, Pai added. Customers planning to outsource to India will evaluate both Indian companies as well as multinational companies with operations in India, he added.

Source:http://www.pcworld.com/businesscenter/article/186788/indian_outsourcers_see_a_turnaround_ahead.html

India’s top tech firms Tata Consultancy Services (TCS), Wipro and several others are pursuing Target’s captive technology centre for a potential acquisition, in what could be a transaction bundled with a long-term outsourcing contract worth $300-400 million. America’s second-biggest discount retailer Target has around 1,500 staff employed at its Bangalore centre, currently doing software development and maintenance work.

“We have been in discussions with them for the past few months and the dialogue is still open,” a senior executive at one of the tech firms exploring this transaction told ET on conditions of anonymity. “There is no conclusion yet about how this transaction can be structured, and it’s very early days,” he added. Both TCS and Wipro count Target as one of their top retail customers.

Some of the world’s top retailers, including UK’s Tesco and America’s speciality retailer Home Depot, have been outsourcing projects to Indian third-party service providers, including TCS and Infosys, apart from their own captive centres in order to support their existing IT systems and also develop newer applications. Tesco, for instance, saves over $100 million every year by outsourcing its IT projects to India, and primarily drives projects from its own captive in Bangalore.

“Target’s India centre could be doing at least $100 million worth of projects (revenues) every year,” another person familiar with the retailer’s India operations told ET on conditions of anonymity. Officials at Target did not reply to an email query sent by ET. TCS, Infosys and Wipro also declined to comment. Few years ago, many retailers started with an Indian captive operation as there were not many service providers who could understand their core operations better. Target entered India in 2004 through a JV with ANSRSource, a Texas-based BPO outsourcing company.

“There is a certain equity in building up the operations (captive) initially, but over the course of time, there is the objective of monetising the operations,” said Avinash Vashistha, CEO, Tholons, an offshore advisory firm.

“Once a particular process becomes commoditised, then any adding of additional resources is not justified as it adds up to the costs.”

TCS, one of Target’s Indian suppliers, supports the retailer’s operations from its delivery centres in Uruguay and Chile, apart from India. Target, which competes with Walmart Stores, reported quarterly revenues of $14.6 billion for the second quarter ended August this year.

Over the past few months, many companies have sold their technology captives in India. Divesting non-core captive operations is a strategy adopted by banks such as Citigroup and UBS for focusing better on their core operations, and also gain better outsourcing rates by bundling such transactions with a multi-year contract. An upfront payment also helps them unlock value from non-core assets. Citibank sold its Indian back-office business to TCS for around $505 million in October last year, and Citi Technology Services for around $127 million to Wipro in December last year. Both these transactions came with assured outsourcing business of around $3 billion together for these vendors.

Source: http://www.businessweek.com/globalbiz/content/nov2009/gb2009114_774412.htm