Source: sify.com

For all those despairing over the prospects for the Indian information technology (IT) industry here is some good news: the bad news in the US is good news for IT outsourcing, particularly for Indian companies.

Technology Partners International, Inc (TPI), the world’s largest outsourcing advisory firm has confirmed there are good times ahead for Indian IT vendors despite softening of IT spending in the US and the Americas in general.

Based on an analysis of the first quarter 2008, (calendar), and the previous six months, TPI which tracks commercial contracts valued over $25 million, said “Tougher economic climate brings opportunity for the outsourcing industry to have a defining year”.

More than ever, companies are looking to their outsourcing service providers to deliver variability in costs and lower overall expense.

In addition, just as we saw in the 2001 recession, there is an expectation that the back-end return to growth will be made possible by the outsourcing industry.

This is borne by the volume of contracts during the first quarter which had a tremendous YOY increase of 20% in annualised contract value (ACV), while it was also within the range of other recent quarters in terms of number of contracts awarded and total contract value (TCV), the advisory said in a statement.

JP Morgan analysts Manoj Singla, Bhavin Shah, Mythili Balakrishnan and Nishit Jasani, reviewing the findings, said the trends clearly indicate increasing importance of offshore players with a global footprint in IT services.

While the near-term demand environment might be softer as indicated in the recent results of Indian IT companies, the offshoring trend appears intact and Indian vendors look set to continue to gain greater market share, they said in a note to clients on Thursday.

The first quarter saw 122 contracts awarded with a TCV of $21 billion and a ACV of $4 billion. The quarter ranks as the second-best first quarter ever in terms of ACV pointing towards the underlying muscle in the global outsourcing marketplace, TPI said in the statement.

What is significant is that while the US and the Americas are showing while Europe, Middle East and Africa (EMEA), regions are signing more contracts of increasing average values, the US and the Americas are demonstrating structural changes in some of the vital measures of outsourcing strategies.

The average TCV of contracts awarded in the Americas has dropped 50% from about $206 million in 2003 to a little more than $100 million in 2008. The average duration of contracts in the first quarter 2008 fell below five years for the first time ever, it pointed.

This strong tendency for smaller and shorter duration contracts is good news for Indian vendors, particularly the biggies among them, who have global operations and have already reoriented themselves for this sort of market.

At the same time it is also good news for Indian vendors like Satyam and others who have started derisking from the US markets and increasing focusing on markets like Europe, Africa and Middle East which accounted for 65% of the global TCV and ACV. The percentage increase of course is also an indication of the softness in the US markets.

Source: http://www.zdnetasia.com/news/business/0,39044229,62040381,00.htm

Over the last three years, the Philippines and Malaysia have emerged as very strong contenders in the IT-related services,” Milan Sheth, partner of business advisory services and leader in technology and telecom Verticals, Ernst & Young India, told ZDNetAsia in a phone interview.

“It will be naïve not to take the threat from these countries seriously,” Sheth said. The Philippines, he said, has emerged as a very strong threat to India in the provision of voice-related services.

Hari Rajagopalachari, executive director at PricewaterhouseCoopers India, said in an e-mail interview: “Poor urban facilities [impacting quality of life] and increasing crime rates are making India a less attractive destination for expatriates–a critical factor in establishing captive centers.”

There are several factors why India may be losing business to other countries, including the strengthening of the rupee, high attrition rate and poor infrastructure.

“Over the last decade, the depreciating rupee [vis-à-vis the U.S. dollar] has contributed about 12 percent to the bottom line of IT-ITES (IT and IT-enabled services) companies. This had helped them maintain very healthy gross and net margins in Rupee terms,” Rajagopalachari said.

The current trend in the depreciating dollar has not only wiped out this advantage, it is also eroding the margins and will continue to do so since the U.S. current account deficit and inflation are showing no signs of reversing.

India’s other problem has been high attrition rate, rising salaries and escalating real-estate costs. These factors have resulted in higher costs, even though India continues to enjoy considerable cost advantages over other nations.

Rajagopalachari said: “While India has an edge in terms of cost arbitrage and lower explicit costs, outsourcing and offshoring companies are paying increasingly greater attention to implicit or hidden costs, like the cost of quality.

“While the Indian IT industry has come a long way in adherence to process parameters [process quality], there is still a huge scope for improvement in the area of customer experience,” he added.

Sheth noted: “In BPO (business process outsourcing), transformational outsourcing is becoming increasingly popular.”

Demand for domain expertise

Outsourcing is no longer seen purely in terms of its abilities to deliver cost improvements. Leading companies now think of outsourcing more strategically, and look to external service providers to help with their own continuous improvement and growth.

Because of these requirements, the service provider’s domain know-how is gaining importance.

Offshoring outfits in countries such as the Philippines, China and Malaysia have been developing expertise in various domains including automotives, telecom, consumer products, retail, IT equipment and healthcare. This has helped attract more customers to their respective country.

According to a recent survey by French consulting firm Pierre Audoin Consultants (PAC), fewer global delivery centers were opened in India by the U.K.’s 20 largest IT services suppliers.

“Of the 21 centers opened since January 2007 by the big 20 U.K. companies, only two were in India, while four were in China and three each [were established] in Eastern Europe and Morocco,” the PAC report said. The 20 largest U.K. companies featured in the report included Accenture, BT Global Services, Capgemini, Capita, CSC, EDS, Fujitsu, Hewlett-Packard, IBM and Logica.

In addition, India’s multi-sectoral growth is exacerbating manpower deficiencies across sectors. There is scarcity of skilled manpower across every industry, and the IT-ITES sector is no exception.

According to industry estimates, the IT and ITES industry will need some 850,000 additional skilled manpower by 2010. India’s education system needs to keep pace with these growing scarcities.

According to Sheth, skill scarcities are a genuine impediment. “But, it’s not that we aren’t aware of these challenges. The private sector is doing enough to meet the skill shortages,” he added.

Sheth noted, however, that the Indian education system leaves a lot to be desired.

“There is a complete disconnect between education boards and the industry. For instance, in China, there are specialized courses for mobile application devices, which have proven very useful for companies like Nokia,” he explained. “In India, there are no such courses. It is the corporates that are becoming semi-universities in their own right.”

Does India’s advantage lie in its familiarity of the English language? PricewaterhouseCoopers’ Rajagopalachari believes so.

He said it is unlikely that China can overcome language, accent and cultural issues in one or two decades.

“The cultural attunement of the young Indian urban population toward Western styles, literature and social mores is a lot more than the Chinese society, which is much more insular,” he added.

Will India lose its offshoring throne to countries such as the Philippines and Malaysia in the long-run? Not really. “The sheer supply elasticity of the skilled Indian labor market remains unmatched. India will remain the leader in outsourcing,” Rajagopalachari said.

The Nasscom Everest Report 2008 confirms his contention. According to the report, India emerged as the “destination of choice” for offshore delivery of business processes, when compared with countries such as the Philippines, China, Canada, Ireland, Mexico and Central and Eastern Europe (CEE).

“India has emerged as a leading destination, in terms of market share as well as the length and depth of work,” the report said. India has a market share of 37 percent in the BPO market, as opposed to Canada’s share of 27 percent and the Philippines’ share of 15 percent. Ireland and Mexico had a share of 5 percent each, while China’s footprint stood at 2 percent.