Source: www.telegraph.co.uk

Anyone looking for proof of the offshoring model that shifts work to low-cost countries need look no further than the contrast in fortunes between IT services companies LogicaCMG and Xansa.

Logica recently came tail between legs to tell the market that revenues from its UK business slid 15pc in the first quarter. As well as some contract-specific issues, chief executive Martin Read conceded that the company had not pushed its model of blending on and offshoring hard enough, and that it was struggling in the face of increased competition from the Indian outsourcing giants.

Smaller rival Xansa tells quite a different story and reported a 7pc increase in sales in the first half.

Xansa considers that its success is driven by the fact that it was the first British IT company to realise the potential of moving staff to India back in 1998.

While 99pc of its business comes from UK clients, more than half of its 8,000 employees are now based in India, from Pune to Chennai. Logica, on the other hand, has just 10pc of its workforce outside Europe.

It has not, however, been an easy ride for Xansa. The company suffered declining revenues from 2003 as it transformed its business model, with the inevitable impact on the share price.

From a low-growth, low-margin business of managing applications, Xansa has moved into the high-growth, high-margin business process outsourcing market.

With its finance, accounting and human resources operations, it now competes with the likes of Accenture for big corporate customers, from the Royal Mail to Boots.

As well as an impressive commercial client list, Xansa is building its public sector business, which now represents 21pc of sales. This is exactly the kind of long-term steady contracts Xansa needs. They are almost all with central government, which is more comfortable with Xansa’s offshoring model than local government. And the work is unlikely to dry up as outsourcing quickly and quantifiably achieves the kind of cost-cutting every government wants and needs.

The key factor to boost this company’s share price performance in the near-term is the profit margin improvement that should follow its shift to more business process outsourcing work. Xansa reported margins of 7pc in December and management is confident it can push this up to high single digits. That may be too conservative as margins elsewhere in the sector are in double digits.

Chief executive Alistair Cox is suitably ambitious. As well as winning market share from some of the major players, he reckons the industry itself is growing.

Increasingly clients want help with their human resources department as well as IT support. On that premise Mr Cox considers there is still massive untapped potential in the UK before Xansa even begins to look overseas.

The shares are trading on around 16 times forecast earnings. While Capita is almost 15 times the size of Xansa the two are not dissimilar, and Capita is trading on around 27 times forecast earnings. Buy.

Source: www.business-standard.com

Even as, the next few years could see China emerge as a major IT sourcing centre, including for back office skills, (exactly where India was positioned, before it wore the Numero Uno crown, when the whole off-shoring / outsourcing concept began), a concept called ‘near-shoring’ (proximity to the client) and ‘time-zone’ advantage is seeing Eastern Europe and Latin America move up the outsourcing popularity index scales. With Mexico, Argentina, Brazil and Costa Rica, some of the most mature sourcing destinations in South or Central America, it is the Indian vendors that lead ‘The Charge of the Light Brigade’!

Cultural ties and close physical proximity to USA / Canada, including shared time zones, short travel time and frequent flights, are just some of the benefits that have made Mexico, the most accessible low-wage market for the North American firms.

Taking notice, just a while ago, TCS expanded operations in Latin America by setting up its first Global Delivery Centre (GDC) at Guadalajara in Mexico. N. Chandrasekaran, TCS Executive Vice- President and Head of Global Sales and Operations confirms: “Apart from a strong domestic IT market, Mexico shares a similar time zone with the US and is within 5-6 hours flying distance from anywhere in the US, allowing us the ability to provide near shore services for our large US client community.”

And so, the last five years have seen TCS set up operations in 14-countries, including major centres in Argentina, Brazil, Chile and Uruguay, where it employs over 5,000-professionals to cater to more than 150-clients, and TCS Latin America saw its 2006 – 07 revenues touch $159-million (around Rs. 650-crore).

As well, TCS acquired a 100% control of TCS do Brasil, its Brazilian joint venture that saw the Indian IT major hire over 1,700-employees and record revenues of $66.5-million (around Rs. 273-crore) for FY2006-07.

Other Indian firms to follow the TCS lead, saw Cognizant last year, set up operations in Buenos Aires. While, this April, Infosys announced plans to establish a software development subsidiary in Mexico, with an initial investment of $2-million (a little over Rs. 80-crore) to serve its US customers.

According to a McKinsey Global Institute (MGI) study titled: ‘Shaping A New Agenda for Latin America‘, it is Brazil, from amongst all Latin American countries, to be well placed to supply labour to the global off-shoring market, because of its strong Telecom infrastructure, attractive IT vendor market and relatively low costs. This, even as, the report cautions, Brazilian workers possess weak English-speaking skills and lack international experience, which makes many of them unsuitable for employment.

The McKinsey report states the Latin American country of Chile has a risk profile better than that of India and China, thus making it most attractive from amongst all Latin American countries. Moreover, it has the lowest electricity costs in the world. However, Chile’s IT workforce and market for IT / BPO services are small.

On the other hand, the Mexico advantages start with low labour costs and, even though power costs are high in Mexico, it still holds the most attractive position among the Latin American countries studied for the report. Recent annual sales figures show, fifty of the largest information technology (IT) services providers had 4.3-lakh employees located in India, out of their total workforce of 1.7-million. Tata Consultancy Services (TCS), Wipro, Infosys, Cognizant, Satyam, HCL, Patni, between them more than doubled their combined headcount, over the last two years to 3.54 lakh.

And, according to recent research by Computer Business Review, a vast majority are based in Indian delivery centres. While, ComputerWire states, the top 50-suppliers have a combined 5.37 lakh employees in low-cost global sourcing locations, with India accounting for 80%.