The fortunes of India’s top outsourcing firms are firmly hitched to the West – which means their bumpy ride is set to continue, says Saritha Rai.
Economic problems in the US and the continuing debt crisis in Europe, their mainstay markets, are giving the Indian outsourcing industry sleepless nights. And, as if the business environment was not already tricky enough, outsourcing companies are beset with internal leadership and restructuring challenges.
The top four of Indian outsourcing – which includes the New Jersey-based Cognizant by virtue of most of its work being executed in India – are particularly exposed to the global economic crisis.
Demand for outsourcing is slowly burgeoning in the domestic market but India’s outsourcing wagon is, for the moment, firmly hitched to economies in the West: some 80 per cent of the Indian industry’s $60bn yearly revenues come from these markets.
A dismal economic forecast in these markets sparked a sell-off of outsourcing stocks, prices dipping an average 20 per cent to 52-week lows.
However, among the top four, industry leader Mumbai-based Tata Consultancy Services (TCS) maintained a cheery outlook, saying that it is not expecting changes in demand from its customers in North America and Europe.
But 2012 is the year in which the top companies may see a dramatic reshuffle in their long-held rankings. In fact, number three Wipro has already ceded its slot in the hierarchy to comparative newcomer Cognizant.
Cognizant is forecasting 30 per cent year-on-year growth rates for 2011 and at such a speed could also vanquish number two Infosys by the year-end. A gap of less than $200m in quarterly revenues separates Cognizant and Infosys. Meanwhile, number one Mumbai-based TCS has widened its revenue lead over the rest while closing the profitability gap with Infosys.
In Infosys’ typically understated way, its new CEO SD Shibulal said the company is facing a “challenging environment” as customers tighten their tech spends.
Wipro CEO TK Kurien meanwhile told me the market sentiment is quite uneven: “While there are still areas of optimism among hues of early pessimism, growth will predominantly tilt towards certain markets and industries,” he said.
Both Infosys and Wipro have delivered lacklustre quarterly results in the June quarter, with Wipro revenues growing quarter on quarter by 17 per cent and Infosys 23 per cent – well below the 30 per cent revenue growth delivered by Cognizant and TCS. As the intricacy and sophistication of outsourced work increases, Infosys and Wipro are straining under the traditional cheap labour model.
Both Infosys and Wipro have recently wrestled with leadership changes as well. Infosys’ Narayana Murthy stepped down on 21 August as executive chairman of the company. KV Kamath, who has a background in banking rather than outsourcing, has taken over alongside a new CEO, the last of the original Infosys founders, SD Shibulal. Wipro, meanwhile, has experienced a series of high-level exits, some voluntary and others not, and has installed a new team at the top.
For top Indian companies, the challenges are two-pronged. On the one hand, many are still struggling to…
…climb up the ladder from lower cost technology services to higher value enterprise offerings. The skilled consultants who can deliver the value-add are becoming harder to find and getting more expensive by the quarter. At the same time, their low-billable services, such as business process outsourcing and testing, are becoming harder to scale up.
Still, the industry is quite prepared for changes in the macroeconomic environment, Wipro’s Kurien said. Wipro is looking to cash in on the crisis by helping customers adapt to the new, heightened-risk market conditions through providing proactive services such as variabilisation of IT and analytics. “We want to work with customers to build innovative products and channels to go after growth,” he said.
Could further trouble be brewing for Indian outsourcing? In a weak economic climate and amid rising unemployment in the US, the upcoming American presidential election could lead to a growing backlash against Indian companies: the 2012 US election campaign will probably be dominated by the debate about hot-button topics such as jobs and outsourcing.
Already Indian companies are facing visa challenges and finding it harder to import outsourcing workers to the US. “The visa issue fundamentally alters the business model for Indian companies with its operational – inability to staff projects on time – as well as commercial – higher visa and subcontracting costs – impact,” Nimish Joshi, analyst at investment and brokerage firm CLSA, said in a note to clients.
However, India’s outsourcing industry lobby Nasscom has a more positive spin on the current situation: the troubles in the US could pump up demand for cheaper offshore work as companies look for more savings.
Rajan Narayanan, director of consulting firm Second Avenue, sees the challenges as “thunderstorms”.
“Even if the global economic crisis rolls into something more serious, I’d expect Indian outsourcing companies to continue growing at near double-digit rates,” he said.