Thunderstorms ahead: How India's biggest outsourcers are facing down the economy's woes

Top outsourcers could see a dramatic reshuffle in their long-held rankings...

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.

Bangalore, India

Demand for outsourcing is slowly growing in India's domestic market but the industry's fortunes remained tied to the WestPhoto: ARTEKI/Shutterstock

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...