India’s Labor Arbitrage Strategy

It has been an interesting few days of being on the receiving end of tremendous hate mail due to my widely syndicated and (looks like) read and discussed Death of Indian Outsourcing article. >>>

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Forbes Column 08: The Coming Death of Indian Outsourcing

My most recent Forbes Column, The Coming Death of Indian Outsourcing, discusses companies like ADP and their “nearshoring” moves.

Indian IT Industry: The Next 8 Years

Forbes has some scary statistics on the salary hike rate in India. The 2007 rate is 15.1%, up from 14.4% the previous year. 2008 forecast: 15.2%. This is the fifth consecutive year of salary growth above 10%.

Good lord!

Is Death of Indian Outsourcing all that far out? >>>

Patni and the H1-B Wage Fraud

Here’s a scary piece from Business Week: Are H-1B Workers Getting Bilked? addressing the issue:
Overseas outsourcing companies are accused of underpaying foreigners on work visas—and hurting U.S. wages.

Is there anyone among our readers who have direct experience with this? I thought this kind of under-wage body-shopping had ceased in the early nineties …

Death of Indian Outsourcing

“Are you kidding? No way!”

In 2008, the IT and IT enabled services (ITES/BPO) industries are supposed to be the major drivers of India’s economic growth. According to Nasscom, the two industries combined will employ 4 million people and account for 7% of GDP and 33% of foreign exchange inflow. The death of this industry is far from anyone’s mind.

Let me tell you a story. >>>

Accenture Should Roll-Up Indian Services Companies

Is Accenture (ACN) still in the body-shop business model? Yep. Why ruin a good thing when it’s working, some would ask. And India continues to be a strong leverage point for Accenture’s outsourcing activities, with a new consulting center opened in the last quarter. This was also reflected in the 40% increase in staff being strongest in India and the Philippines (41% increase YoY Q1). >>>

Infosys In Light of Recession Fears

The general feeling of the West has been that the rise of the rupee would slow down the immense growth of business being funneled into India. The reality is that growth continues to boom in India, barely slowed by currency exchange rates. The short term looks alright for Infosys (Nasdaq: INFY).

Infosys’ Q3 revenues posted at $1.084 billion, a YoY increase of 32% compared to the same quarter in 2007 and a 6% increase versus the previous quarter. Net profit is expected to post at $299 million, up 7% from Q1 and 20% higher YoY. The boost in revenue was attributed to the 47 new clients that were added in Q3. Guidance forward into Q4 expects Infosys to earn between $1.136 and $1.142 billion in revenue and between $4.17 and $4.18 billion for the fiscal year in total. Liquid cash balance exceeded $2 billion.

The stock, however, is getting hit because of the CEO’s comment that deals are taking longer to close. >>>

Trend Radar 2008: Offshoring

Did you know, China now offshores manufacturing to Vietnam? If Pakistan behaved itself, may be India would start offshoring some call-centers over!

In 2008, outsourcing, offshoring and globalization are likely to continue as major trends.

Rising wages in the most popular offshore centers (especially Bangalore), are eroding the cost advantage that drove this business to India in the first place. When the practice began, there was a 1:10 cost advantage. Today, this has dropped to 1:3. Over the next 5 years, perhaps, it won’t make sense to send work to India anymore. At least, not to the major Indian cities. >>>

Trend Radar 2008: SaaS in the Enterprise

A Gartner report from August 2007 predicted that SaaS adoption in the Enterprise will be rising at a 22% CAGR through 2011.

Worldwide total software revenue for software as a service (SaaS) within the enterprise software markets is projected to surpass $5.1 billion in 2007, a 21 percent increase from 2006 revenue ($4.2 billion), according to Gartner, Inc. The market is poised for strong growth through 2011, when worldwide revenue will reach $11.5 billion.

In the last few days, several analysts have voiced their reasoning on why SaaS will do very well in the enterprise this year. >>>

Accenture Has Survived the India Onslaught Well

Based out of Bermuda, one first wonders if Accenture is a fly-by-night. But this is hardly the case. The former Andersen Consulting, tainted by Enron, is now a $20 billion strong management consulting, technology services, and outsourcing company. For Accenture, consulting represented 60% of revenue ($11.86 billion) and outsourcing 40% ($7.84 billion). Despite the current market jitters, CEO Bill Green posits that Accenture can endure economic headwinds by focusing on solving long-term strategic issues that clients face.

The approach has continued to work. Accenture has grown despite economic uncertainty due to diversification across verticals including technology, government, financial services, and others. The Americas and Europe/Middle East/Africa currently represent 45% of revenue each, while Asia-Pacific makes up 10%. Q4 revenue jumped 29% to $5.11 billion along with annual revenue, which climbed 18% to $19.7 billion (a new record). Part of this was based on new 2007 bookings totaling $4.9 billion for the year, slightly lower than 2006. Net income in Q4 dropped to $316.8 million versus $346.4 million YoY, adjusting for a past hefty tax benefit. Financial services represent 22% of revenue in Q4 and the Communications and High tech sector accounted for 24% of revenue, the remainder being made up by other verticals. >>>

Cognizant’s Growth Will Come From Europe

Cognizant’s (CTSH) 45,500 employees provide global IT and business process outsourcing services, including in financial services (up 49% YoY), healthcare (up 62% YoY), and retail/manufacturing/logistics (48% YoY). With a 62% YoY growth, the question is will Cognizant maintain its speed into Q4, especially with the current market jitters?

Q2 revenue posted at $516.5 million, up 53% YoY to Q2 in 2006, and up 12.2% quarterly ($460.3 million in Q1). Top 10 client revenue grew 11%, and total clients reached 430 (97 strategic). US revenue equals 84%, Europe is 15%, and 1% from Asia. Based on the above, Q3 guidance is $550 million (45% YoY). Cognizant will hit the $2 Billion annual revenue mark this year.

The Indian IT outsourcer reported third quarter revenue of $558.8 million, and with EPS of 32 cents GAAP, 34 cents non-GAAP. The Street had expected $556.4 million, 29 cents and 34 cents. But for the fourth quarter, the company sees revenue of $590 million to $595 million, which is below the consensus of $597.6 million. Cognizant sees EPS for the quarter of 31 cents GAAP, 34 cents non-GAAP, in line with expectations. The softer Q4 guidance has sent the stock tumbling down almost 20%, offering an excellent buying opportunity.

Company cash is approximately $750 million. And Cognizant has already authorized a $100 million buyback of shares. At the same time, the company is sinking another $100 million into its domestic infrastructure. >>>

TCS’s Acquisitions

India’s information technology exports will rise by 2.5 times to $80 billion by 2011 declares India’s communications and IT minister. A company that has been one of the single largest beneficiaries of this trend is Tata Consultancy Services (TCS.NS).

TCS has rapidly set up centers in nearly every continent. With more than 90% of revenue from repeat customers, the TCS strength is its Global Network Delivery Model that delivers based on the same standards, methodologies, excellence and expectations globally. The recent 10-year, $1.2 billion contract with Nielson Company reflects this approach. The geographical coverage strategy is no different from competitors Infosys or Satyam.

To support growth TCS is also taking costs offshore to limit expenses, similar to competitors. The TCS expense mix is currently 43% offshore versus 53.3% onshore and 3.7% other, a 2% increase from Q1 and YoY. And like its competitors, TCS seems also to be stuck with the body-shopping business model. >>>

Satyam’s Growth Prospects Look Solid

Among the outsourcers, Satyam (Nasdaq: SAY) today stands out as a safe global bet because it continues to consistently perform on its goals. Satyam provides information technology services and business process outsourcing (BPO) services in the U.S., Europe, the Middle East, and Asia-Pacific. The company’s approach and “Satyam Way” is in 4 key points of strategy:

* Increase the proportion of offshore services, to increase the profitability of contracts.

* Reduce staff attrition to hold onto key staff experience, today a very big problem in India.

* Increase new client revenue and maintain relationships with existing customers, so that there is adequate predictability in the ongoing revenues, as well as human resource planning and allocation, a tough job at this level of scale.

* Increase value to customers via integrated business solutions across functional areas and improved support for relationships.

How has this strategy worked for the company? Extremely well. In fact, it would be interesting for the smaller Indian outsourcers to learn from Satyam (and Infosys, which we covered yesterday), how to modulate the business as they scale. >>>

Infosys Needs to Diversify Out of Body-Shopping

The rupee value may rise making Indian services more expensive, but companies like Infosys adapt. In this piece, we look at what is going on inside the outsourcing giant, and whether their strategy is enough to sustain continued growth.

Infosys (INFY) delivers information technology (IT) enabled outsourced business solutions and provides business process outsourcing (BPO) services. In Q2, Infosys achieved $1 billion dollars in quarterly revenue for the first time, growing 37% versus Q1 (annual revenue was $3.1 billion and net income $850 million ended March 2007). Only 3-4% of this revenue comes from the Indian domestic market (63% comes from the US, Infosys’ largest market, 27% from Europe, UK primarily, and the remainder is generated in Asia). >>>

Offshoring Secrets:Offshoring versus Outsourcing

By Utkarsh Rai, Guest Author, Author of “Offshoring Secrets”.

Offshoring and Outsourcing are two words that are often used interchangeably. For the purpose of this article let us define the terms in a simple manner: “offshoring”, where the organizations decide to open their own captive center in another country; “outsourcing”, where the company decides to contract the work in another country. In this article we focus on India, but the basic principles are the same with other geographies.

Let us cover the circumstances under which a company should outsource:

Headcount increase: The organization does not want to add headcount to its payroll because the project would be of short duration or that there is only need for a certain number of people at various phases of the execution.

Non-Core functions: The organization wants to engage its own people in the core functions alone and outsources the non-core activities, such as supporting a product line that is going to be obsolete in the near future.

Kick starting a project: Sometimes, in order to kick-start a new project, a company requires some of the resources immediately with a specific background.

Setup & execution overhead: When the company wants to avoid the overhead related to setup, hiring and managing teams, project management.

Cost: Though there is no industry data to prove whether offshore centers are cost effective to outsource or do in-house as captive centers, based on unofficial data neither has any significant cost advantage over the other. >>>