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Indian second-largest software company, Infosys, found out last month that sometimes beating expectations on profits isn’t enough to please the markets.

On Wednesday, Cognizant – the US-headquartered competitor that’s making things tough for Indian behemoths like Infosys and Tata Consultancy Services – found out that sometimes projecting double-industry-standard growth just isn’t enough either, when its stock fell 1.75 per cent compared to a 0.41 per cent rise in the Nasdaq. What’s the problem? And what are the lessons for its Indian competitors?

The problem it seems is that Cognizant, after eight straight quarters of outperformance, merely met expectations. It saw a 16.4 per cent rise in net income to $240.1m for the quarter ending in December, on the back of a 26.9 per cent rise in revenues, to $1.66bn, just below the $1.67bn consensus. It forecast a minimum 23 per cent rise in revenues for 2012, to $7.53bn, according to results released on Wednesday.

Analysts told beyondbrics that the company will benefit from an improving economic environment in the US – where it earned nearly 80 per cent of its revenue in the quarter ending in December – but that its growth projection for the coming year, despite its 33 per cent increase in revenues for 2011, might be a tad ambitious, given the overall economic picture.

“Twenty-three per cent minimum guidance is a good number, but for the first quarter of next year, they are guiding at 2.2 per cent which means that the growth rate for the remaining 3 quarters would have to be at 6.8-6.9 per cent,” said Ashish Chopra, analyst at Motilal Oswal. “[That]is a strong number to assume in the current environment.”

But R Chandrasekaran, Cognizant’s chief executive for technology and operations, told beyondbrics that the company was confident that it could maintain much greater growth than the 11-14 per cent projected for the industry during the fiscal year ending in March 2013 by trade group Nasscom.

“We are also entering 2012 with a great deal of confidence stemming from a very loyal customer base,” he said. “The traction we are seeing from some of the new [products] like consulting [and] infrastructure outsourcing… is really helping us.”

Cognizant, which has around three-quarters of its workforce in India, took over from Infosys in the north American market last year. It competes with the “big four” Indian IT services and consulting firms of Wipro, Infosys, TCS and HCL, and overtook Wipro in terms of reveune mid-2011.

Indeed, analysts told beyondbrics that what separates Cognizant from its Indian competitors is the way it reinvests in itself in order to build up the company’s front-end and sales operations.

“They’re much more market facing, their ability to understand clients’ needs is much higher, their ability to connect with clients is much better and they are more business focused,” said Sudin Apte, analyst at Offshore Insights. “That has helped them to bring in better returns.”

When it comes to tough economic times, IT companies like Cognizant can benefit as other companies need to save money, by outsourcing operations that would cost more to do in-house.

“Even if [a customer’s budget] remains flat… in absolute dollars he’s spending same amount on technology but wants to do more with the same budget,” said Chopra. “The only way to do that is to take out costs on the existing work – if it’s being done onsite then you have to move it off-shore, and that directly plays into the hands of the offshore providers.”

“That drives the growth for these guys even during the tough times,” he added.

It’s not necessarily a new lesson – just one that needs to be done better than before as competition increases and the market demands ever-better results.

Source:http://blogs.ft.com/beyond-brics/2012/02/09/cognizant-lessons-for-indian-it/#axzz1lxmYyVXN

IT-Outsourcing has become one of the most significant growth enhancer for not only the Indian economy but also for various socio-economic parameters such as employment, standard of living and diversity among others. IT-BPO sector in India, alone has aggregated revenues of $88.1 billion in FY2011, generating direct employment to more than 2.5 million people. The industry has played a significant role in transforming India’s image from a slow moving bureaucratic economy to a land of world class technology solutions and business services.

The upbeat domestic IT-BPO spending trend will continue in FY2012 as the industry is expected to grow at 16 per cent to reach $20 billion. IT spending expected to significantly increase in verticals like automotives and healthcare while the government, with its focus on e-governance, will continue to be a major spender. Including the contribution towards India’s growth, IT-outsourcing is illustrating many trends and insights.

1. Knowledge Professionals

Out of 4 millions pass outs every year in India, 3.3 millions are from non-technical backgrounds including arts, commerce and science. This has given birth to an employability gap, where significant amount of money is spent to enhance employability with in-house training and academia partnership, creating talent pool of process and vertical specialists, which is equivalent to an employee’s 3-4 per cent of their salary bill. During the FY2011, there was a much greater focus on ongoing development of specialized skills and capabilities as Indian professionals has to be transformed from knowledge based talents to skilled manpower. Analysis indicates that the training spent per employee in the IT-BPO industry is among the highest in the organized services sector.

2. Global In-House Centers

Global In-House centers (GIC) established ‘proof of concept’ and branded India as a global sourcing destination. Their impact on India extends beyond revenues and employment – playing a leading role in developing an R&D and product culture, spearheading initiatives to develop affordable products for emerging markets and creating entrepreneurship opportunities. GIC contribute to 22 percent of IT-BPO export revenues and 21 percent of employees. North America and Europe happen to be the largest investors in the captive space; together they contribute to more than 90 percent of the captives in India. The industry has significantly grown over the last 5 years and currently has representation from most of the verticals like Aerospace & Defense, Automotive, BFSI, Bio-Technology, Chemicals, Computer Hardware, Education, Electronic/Electrical Equipment, Energy, Healthcare, Industrial, Semiconductors, Software/Internet, and Telecommunications.

3. Total Contract Value

After a devastating Q2 of 2011, the IT services contract signing activity picked up slightly in the Q3. In this third quarter the total contract value was $27.3 million, which is 43 percent up from Q2 2011, but is 21 percent down on the third quarter of 2010. India made 416 deals in this third quarter of 2011, which is again 12 percent down from the same quarter of 2010. North America, after a terrible start in the beginning of the year, now has reached a total contract value of $3.1 billion, grabbed from the private sector, which is higher than the total generated in the first six months of the year. Europe too has hit total contract volume of $3 billion from the private sectors, with more than one-third of the total derived from the UK. These are the utmost important reasons why India has lost some of its TCVs.

4. Software Products

There’s a noticeable shift in the Indian Software product business ecosystem which has helped create an enabling environment for the growth of Indian Software Products. There are many catalysts in the development of the domestic market for software products, such as, improvements in the talent and support ecosystem, innovations is software product technology, delivery/business models, and changes in the Indian economy. Increased growth of IT by enterprises, especially among SMBs, and home-users has driven growth in this segment.

5. Indian IT to Grow by 16-18 Percent

Software lobby Nasscom has projected that Indian IT-BPO will attain a growth of 16-18 percent by FY 2012, and despite having so many tilting drawbacks it is quite confident about its survey. “There is no reason for us to be worried. We have spoken to customers, and they are looking at expanding into geographies and bringing newer solutions to the market”, Nasscom President said on the sidelines of the Nasscom BPO Strategy Summit 2011. The growth in software and services export is expected to be 16-18 percent and the sector is slated to bring in revenues of $68-70 billion. The growth in the domestic market is estimated to be 15-17 percent, with revenues of about $19-20 billion.

Source:http://www.siliconindia.com/shownews/Indian_ITOutsourcing_sees_Mixed_Trends-nid-99763-cid-3.html