Som Mittal is in an optimistic mood. This year, he expects India’s IT outsourcing companies, for so long the darlings of the country’s stock market, to deliver double-digit growth as heavyweights such as Infosys, Wipro and Tata Consultancy Services bounce back from the financial crisis.
Nasscom, the IT outsourcing industry body that Mr Mittal heads, is forecasting that revenues from the sector will rise at least 15 per cent to about $70bn this year as banking and corporate customers in the US and Europe resume spending following a slowdown in growth during the global economic downturn.
But Mr Mittal admits that India’s traditional IT outsourcing model is experiencing a fundamental shift as it adapts to the post-economic crisis environment. “We’ve now moved to an outcome-based model” – being paid on performance, rather than one based solely on the number of people deployed on any one job, he says. “That is giving outsourcers an incentive to be more efficient.”
Analysts put it more bluntly, saying that India’s IT sector has reached maturity and, while revenues are still growing, margins are being squeezed.
Milan Seth, a partner and technology analyst at Ernst & Young in India, describes the global financial crisis as a “game changer” for many IT outsourcing companies. Customers are now looking for more tailor-made and innovative solutions.
But analysts say companies such as Wipro and Infosys have been slower to respond to their clients’ shifting demands.
Shares in Infosys, for example, dropped 10 per cent in April when the country’s second-largest IT outsourcer delivered full-year results and forecasts below expectations. Meanwhile, Wipro saw 6 per cent revenue growth in 2010 compared with 24.3 per cent for TCS and 40 per cent growth for rival Cognizant, another smaller competitor.
Sudin Apte, chief executive of IT research company Offshore Insight, says US-listed Cognizant has performed well coming out of the crisis because it shifted away from only offering cheaper back-office functions and has instead offered innovative solutions that have an impact on the companies’ overall performance.
“It’s not only about cutting costs, it [is] about creating tangible value,” says Mr Apte. “The days of vanilla [basic] outsourcing are over. Indian companies need to become more like the IBMs, Accentures and Capgeminis of the world if they want to survive.”
Malcolm Frank, chief strategist at Cognizant, says customers no longer want simply an existing function delivered at a cheaper price but are also looking to restructure their business and take advantage of new technological shifts – such as the move to cloud computing and mobile working.
Overseas groups are also encroaching on the Indian outsourcers’ home turf.
IBM is a market leader in domestic IT services in India, holding a 10–15 per cent market share, according to Forrester Research. Meanwhile, Capgemini’s business grew 24 per cent last year in India, higher than most of its Indian rivals, generating $4bn in revenues.
Such threats to the traditional model come as Indian IT outsourcers face other challenges.
The US recently raised the cost of applying for business visas used by Indian outsourcers to send their employees to overseas locations from $320 to $2,000 amid calls from politicians to protect US jobs.
Mr Mittal says the rise in visa costs is unlikely to have a big impact on the industry. But he admits that Nasscom’s members are concerned that the “political rhetoric” could be converted into more serious action.
Indian companies point out that they already have operations in the US, staffed by local people, which helps to counter claims of protectionism. Others are opening offices in Latin America that are able to serve clients in a similar timezone without the same visa restrictions.
Meanwhile, analysts say that above-average wage rises in India’s IT outsourcing industry could become a concern. Arup Roy, a principal analyst at consultancy Gartner, says wages have risen about 15 per cent a year.
Mr Roy says that for many international companies, the key reason to outsource some technology functions to India is price. But he says that, while India still remains a low-cost destination, that advantage is “depleting with every passing year”.
Indian IT outsourcers are still expected to see a 10 to 15 per cent rise in quarter-on-quarter growth, he says. “The problem is that investors have got used to growth of 20-25 per cent. Investors will have to reset their expectations.”
Source:http://www.ft.com/cms/s/2/8cb5b302-952c-11e0-a648-00144feab49a.html#axzz1P7e9vYui
