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Despite the subdued trend this year, India’s IT outsourcing is expected to pick up during the second half of the next year.

As per Springboard Research s latest study, the Indian IT services market is expected to grow from $4.1 billion in 2007 to $8.1 billion in 2011, recording a CAGR of 18.6%.

The study notes that 65% of the IT decision-makers in enterprises expect an increase in their investment in IT outsourcing in the next two years, while 29% expect investment to remain constant.
The economic slowdown has impacted the IT budgets of most enterprises, with nearly a third of them slowing their IT-related investments.

“For CIOs, the economic slowdown is clearly an opportunity to manage their costs and they have shown an open-minded approach towards IT outsourcing, further accelerated by an emerging emphasis on improving business performance,” said Sudip Saha, senior research analyst for IT services at Springboard Research.

Mumbai: In a bid to cut costs without compromising on seat capacity, some of the India’s outsourcing firms have tied up with telecom companies for outsourcing their own communications infrastructure, a model now known as “hosting services”.

Typically, BPOs have to incur a significant cost upfront in procuring technical requirements like automated call distribution system, dialers, dialer license and customer relationship management software to help connect its centre in India to clients across the world. Now, hosting services ease the burden on BPOs in both installation of these technologies, and more importantly, their maintenance.

Telcos, such as Verizon, Qwest and Genesys, are tapping BPOs with these “on-premise” services. According to Shrikant Parab, Director for global BPO operations at CDC Global Services, a U.S.-based company with call centers in Mumbai and Pune, the hosting services model helps a typical call center with 25-100 seats in saving Rs 35-40 lakh.

Raman Roy, who’s Quatrro, a BPO that provides mortgage and legal solutions among others, too, has jumped into the hosting bandwagon and he thinks this new strategy will change the way the BPO industry has been working. With hosting services, BPO players say, all that a call centre will need to go on-stream are switches, routers, headsets and computers.

“If we have to put in place the infrastructure, we will also need to hire those who have experience in operating hardware and call centre software. This will cost us about Rs 10-15 lakh per annum,” said Vikas Gupta, VP operations , Salient Business Solutions, the BPO arm of the Avantha Group.

“The customer pays only a fixed sum of money for the number of seats they contract with us. As the number goes up, the price per seat comes down,” said Yazad Boga, Head of Hosted Contact Center Services of Tata Communications, one of the telcos that offers such solutions to BPOs.

India’s IT outsourcing industry is valued at $47 billion.

India has been the preferred outsourcing destination for so long that we have begun to think that no one can catch up with us. This is a delusion that we need to snap out of fast, said Mike Lafford, group VP of Gartner Research.

China is one country that India-based service providers have to keep looking over their shoulders for, especially when it comes to commodity-based services, he further said. But the competition is not only from China, but from a host of other third-world countries that are slowly emerging as preferred outsourcing destinations.

“When you look at countries like Vietnam, Thailand, etc., where they compete with India is on the pricing front. This is important especially in the current times,” said Lafford.

But the difficulties are not only from our Asian neighbours. “Countries in Latin America and others like South Africa and Brazil are slowly emerging as outsourcing destinations. Currently, they are catering to organizations based internally, but they could start competing with India and China in the future,” said Lafford.

Plus there are also countries in Eastern Europe that are improving on the outsourcing front. Where these new emerging centers benefit from, according to Lafford, is that organizations that are outsourcing for the first time do not want to move far away from their region. Culture and language are also critical issues.
Speaking of China, Laffard said that though language and culture is a big hurdle for Chinese companies, where they have an edge is that they can learn from the mistakes made by their Indian counterparts and avoid them. So the way is somewhat eased for them.

However, Lafford does say that these new countries will find it hard to compete with the likes of India and China on the skills front. Where they could win is on the culture, language, geography, and most importantly, pricing front.

So what can Indian IT service providers do to maintain their dominance? Many things, according to Lafford. Firstly, they need to establish relationships with countries in geographies other than the US and the other traditional regions. Secondly, language is still a problem in India and Indian service providers need to rectify it immediately. Though English-speaking regions seem to prefer India right now, if we want to tap non-English speaking geographies like Africa, South America, Eastern Europe, etc., then language and culture will play a major role.

The global economic meltdown can be viewed as a treasure trove of opportunity, if the approach is right. “We have seen companies that never outsourced, considering outsourcing due to the unstable scenario. Insourcing is another huge opportunity and this is seeing growth currently. However, service providers shy from this due to the lower business margins.” Lafford also said that the momentum of outsourcing is such that it might slowdown, but never stop completely.

There certainly hasn’t been much positive news on the IT job front lately. Earlier this month, we shared reports that the computer sector became one of the top three industries eliminating workers in January. If there was a glimmer of hope in that figure, it was a San Francisco Chronicle reporter’s contention that some of those cuts would come through attrition rather than workers actually getting pink slips.

That’s exactly what is happening , reports InfoWorld, in an article republished on CIO.com . When tech vendors like Microsoft and Sun announce sweeping job reductions, they include currently vacant jobs that will remain unfilled and planned positions for which folks won’t be hired. It’s a common bit of “smoke and mirrors,” says Forrester Research analyst Natalie Petouhoff, a way for companies to signal to their shareholders that they realize the need to cut costs.

Such announcements also typically reflect a worst-case scenario of the number of jobs a company thinks it may end up needing to shed. While Microsoft last month said it would cut 5,000 jobs over the next 18 months, so far it has laid off 1,400 employees. It could make up the difference “simply by not hiring in certain divisions,” Gartner analyst Neil MacDonald tells InfoWorld.

It was a similar story when Yahoo announced sweeping job cuts in October, wrote Kara Swisher on All Things Digital . At that time, the company indicated it might have to eliminate up to 3,500 of its 15,000 employees. But Swisher wrote that industry observers expect the final tally to be about half that number.

I don’t want to paint an overly positive picture. There’s no question that tech companies are cutting jobs in numbers not seen in years . Still, some companies may look at history and try to trim costs elsewhere instead of simply eliminating jobs in a bid to win Wall Street’s fickle favor. A recent BNET item highlighted a Bain & Co. study that showed laying off employees often hurts , rather than helps, a company’s financial performance. Of the S&P 500 companies that laid off workers in 2000-2001, those that laid off more than 10 percent of their work forces saw their stock prices drop by 38 percent. Companies that laid off fewer employees fared better, with their stock prices remaining essentially flat.

That’s what Cissy Pau, principal consultant for Clear HR Consulting, told me when I interviewed her in December for a story about how some companies are looking at alternatives such as shorter work weeks and pay cuts to avoid sweeping layoffs. She said:

Layoffs without any kind of corporate restructuring or efficiency improvement won’t provide the long-term results you want. If you say “I need to cut the budget by $10 million” and lay off $10 million worth of people, how are you going to deal with the work? What about the expertise you’ll lose? What about the stress of the people who remain? It’s not a permanent solution. The corporate reorganization has to go hand in hand (with layoffs) or else you’re just going to find yourself doing more layoffs

“Outsourcing of processes by global banks and financial sectors will now become vivid to reduce costs,” said Peter Redshaw, VP-Research, Gartner, at the ongoing Nasscom meet in Mumbai. “The matured IT sector and business processes will make India one of the viable destinations for outsourcing banking processes. Until now financial institutions were wary to outsource processes outside their geography,” he added.

Predominantly focusing on expansion strategies, banks and financial institutions in the matured economy have undermined the importance of calculating the operations cost, Redshaw said, adding they will now need to shore operations to the growing economies (India and China ).

Many in the industry have adopted cloud computing model. But due to the inherent disadvantages of cloud model such as exposing the services to the vendor and lack of clear nomenclature and authoritative consortium, banking and financial institutions will need to entirely outsource IT services to reduce cost, Redshaw said.

Raja M.Mitra, senior consultant at World Bank, too, sees countries like India, having track record of proven IT services with large pool of talents, in a better position to bag IT services compared to rest of the world.

Apart from the BPO segment, system integrators in India (which is substantially large, India being a service segment in IT to the world) will also benefit from the present economic scenario.

Peter Coffee, director (platform research) of Salesforce.org said that though expansions in IT are under hold at present, IT investments will now focus towards integrating systems to give customers benefits of interoperability, bringing more business to IT integrators.

Together, the Indian IT sector, with mature process models, services and integration, will bring more value and shoulder international customers to reduce operational costs.

Independent research firm Forrester Research has in its latest tech market report titled ‘US IT Market Outlook: Q4 2008′ revised its 2009 US IT spending forecast. It is now projecting 1.6 per cent annual growth as against 6.1 per cent in US IT spending in 2009, stating that the US IT market outlook is down but not as bad as the 2001-02 tech depression. On the other hand, the report notes that the IT consulting and systems integration services will hit the wall in 2009 and IT outsourcing growth will remain moderate in 2009 and 2010.

While IT outsourcing will get a small lift from the economic slowdown in 2008 as companies turn to vendors that can help cut IT costs, the growth in IT outsourcing revenues will remain moderate. This will be owing to trends toward use of lower-cost offshore resources, smaller scale outsourcing deals and the 9-15 month lag from the decision to outsource. One area of growth is likely to be demand for managed network services offerings, which vendors are pushing and clients are increasingly adopting, the report said.

The US tech market forecast assumes that the decline in US real GDP in Q3 2008 will accelerate in Q4 2008 and the first half of 2009 before a weak recovery starts in the second half.

The report is based on analysis of US Department of Commerce data and financial reports of 49 IT vendors, and details the current IT spending across computer hardware, software, communications equipment, and services. Andrew Bartels, vice-president, Forrester Research, who authored the report said in a statement that the recession in the US would last into mid-2009, with declines in real GDP of as much as 3.6 per cent on a quarterly basis. “This kind of decline in the economy will pull growth in US business and government purchases of IT goods and services down to 1.6 per cent in 2009, from 4.1 per cent growth in 2008. The weakening of the US tech market was already evident in the Q3 2008 data, which showed US revenues of large vendors down by 2 per cent,” Bartels noted.

The report states that the recession will not be a replay of the 2001-2002 downturn, when tech vendors saw big drops in revenues. “This time, computer equipment vendors will see declines of 5-10 per cent in US revenues on a quarterly basis, not the 20-25 per cent drops of the early 2000s. Sellers of communications equipment, software, and IT consulting and outsourcing services will see one or two quarters of declining revenues, but on average will still grow modestly in 2009. So, IT vendors need to have a plan that mirrors what will happen in their sector,” Bartels cautioned.

The report expects financial services, consumer durables, construction and housing, retail, and industrial products (including automobiles) to be the industries most likely to cut back IT purchases in 2008 and 2009. The financial services industry is expected to cut IT purchases by 3 per cent in 2008 and 4 per cent in 2009, and the construction industry by 2 per cent in 2008 and 2009. The retail industry will have no growth in IT purchases in 2009, and IT buying by industrial manufacturing will slow to 1 per cent in 2009, Forrester says, adding that state and local government IT spending will also be weak.

The report notes that the BRIC (Brazil, Russia, India and China) markets are still growing, raising hopes for US export growth to continue. While the major industrial economies have gone into recession, emerging markets like BRIC are still growing, though at a slower pace than in 2007 and early 2008.

The combination of a somewhat weaker dollar in the near term and still-growing emerging markets suggest that US export growth may not collapse.

Indian IT outsourcing and consulting services vendors have seen 3 per cent decline in US revenues in the third quarter (ended September) of 2008. Even Indian vendors saw revenue growth slip to less than 20 per cent, with Tata Consultancy Services (TCS) posting just a 6 per cent increase )see table). Infosys and Accenture had the strongest growth in US IT services revenues at 17 per cent, though still below Q2 figures, Forrester said.