Anything I write about outsourcing seems to lead to a heated debate. My article on the Death of Indian Outsourcing was one such piece. The more recent Obama and Outsourcing received a similar welcome. Regardless of what happens to the outsourcing industry as a result of the US elections in November, outsourcing firms will remain key contributors to a changing global economy. Here is my analysis of the top 10 outsourcing stocks to watch.
Accenture is much more than a plain vanilla outsourcer. It is a consulting firm that can handle multiple processes, applications, and infrastructure outsourcing in addition to having a global footprint. As Accenture (ACN) has expertise in management consulting, technical services and outsourcing, they are one of the preferred vendors that can withstand the market turmoil due to currency fluctuations, salary hikes in India, etc. Their performance in Q208 and Q308 shows that they know how to handle competition and weakening market conditions. Accenture remains my preferred long-term investment.
International Business Machines Corporation (IBM) has not only built up a strong portfolio through acquisitions, but also boasts of a strong global model and a diverse portfolio of businesses. IBM operates in more than 170 countries, and more than 65% of its employees are based outside the US. No wonder it continues to perform well despite the worsening economic conditions in the US. IBM also has a defined country strategy based on acquisition of service companies in the target country. The company’s Q407, Q108 and Q208 results are representative of its strength.
Wtih strong international sales and cost reduction efforts driven by the able leadership of CEO Mark Hurd, HP (HPQ) is on a roll. It has managed not only to survive, but also to grow in markets like PCs that competitors like IBM have exited under pressure from China. With Hurd’s plans for acquiring EDS, the services portfolio is getting stronger.
Infosys (INFY) could have been sold off for $1 million, but decided instead to grow into a $4 billion Indian IT services outsourcing enterprise. Infosys performs well primarily due to market slowdowns and tighter operating cost limitations on businesses in Western countries. However, they have several tasks ahead of them in order to continue to perform: put a more developed strategy in place to address the software ecosystem in the US, decide on a strategy that enables them to play in the more leveraged technology/IP-driven business models, change the business mix and move out of pure body shopping to an SaaS and IP model, and come up with a Wave 3 Strategy.
Wipro suffers from similar problems as Infosys. With labor arbitrage losing sheen, Indian IT industry players, which include Wipro, need to move into the SaaS and IP-driven model from their present body-shopping staple. If they don’t, they will not be able to challenge the Accentures and IBMs of the world.
6. Tata Consultancy Services
Tata Consultancy Services, popularly known as TCS (TCS.NS), has shown its strength in operations by building a global network delivery model that delivers based on the same standards, methodologies, excellence and expectations used and followed globally. They have grown rapidly through their acquisition binge over the past few years. However, like the other Indian IT majors, TCS still needs to find its SaaS and IP partners to mitigate the threats the Indian outsourcing industry faces.
Satyam has been diligently following a 4-step strategy to success: it is increasing the proportion of offshore services, reducing staff attrition, increasing new client revenue and maintaining relationships with existing customers, and increasing value to customers via integrated business solutions across functional areas and improved support for relationships. I also liked their rural BPO Initiative, which is a philanthropic endeavor to ship BPO projects to some of the 600,000-odd villages in India, dropping the cost structure further while creating jobs in India’s poverty-stricken heartland. This strategy needs to morph from a philanthropic effort to a full-fledged commercial scale.
Cognizant (CTSH) is a leading provider of outsourcing services with a focus on the pharmaceuticals sector. Their acquisition of MarketRx pushed them further ahead in the vertical. Cognizant has been growing steadily through acquisitions, becoming stronger in both verticals and geographies, but their dependence on the financial services business is a concern given current market conditions.
Automatic Data Processing (ADP) is one of the most respected outsourcers in the fields of HR, payroll, tax and benefits administration. They have grown to their $8+ billion size through strategic acquisitions focused on the above business segments. ADP is one outsourcing firm that realizes the importance of SaaS in the segment. Of late, the market conditions have been causing them some worry, but they have weathered many such storms.
Paychex (PAYX) is another outsourcer that has realized the importance of SaaS in the outsourcing industry. The company offers HR outsourcing services and payroll services through its core products: Paychex Premier Human Resources and Professional Employer Organization (PEO), Core Payroll, and Major Market Services (MMS). I firmly believe that Paychex has huge potential, especially if it starts acquiring some SaaS companies.