TCS uses the UK as a BPO expansion strategy template
Tata Consultancy Service's UK division, the flagship for its BPO services business, provided a strategic update on BPO last week. TCS generates $680 million in annualised revenues from its BPO division - with more than $250 million coming from its $2.5 billion, nine-and-a-half-year deal with Citigroup, taking its global BPO delivery capability to 27,000 and boosting its financial services BPO expertise.
The template for BPO expansion
The UK, accounting for 29% of revenues, is TCS's most important market because it contains prominent clients on platform BPO deals: Pearl Group on TCS's BaNCS financial services software; media business Emap on its finance and accounting platform; Deutsche Bank on TCS investment reconciliation utility Aspire; and IATA using a proprietary data extraction hosted solution.
These impressive deals were won thanks to its focus on building a domestic business development team in the UK that can engage at a senior level with clients. TCS has also acquired onshore delivery capability. Heartened by its success, the company wants to replicate this model in the US and continental Europe.
A cautionary note on platform BPO
TCS should be proud of what it has achieved in the UK BPO market. Against its many doubters, it has managed to develop and begin the rollout of its BaNCS-based life & pensions (L&P) platform after three years of development. Though this software is the keystone for generating operational and cost efficiency in L&P BPO, the company has already achieved profitability with the Pearl operations through better people and process management, thus proving its non-IT-related BPO management skills. The platform BPO deals with Emap, IATA and Deutsche Bank further support TCS's commitment to its software-led BPO approach.
However, TCS is also more aware of the challenges of selling platform BPO and, in our view, slightly de-emphasising this part of its strategy as it contends with the realities of the market. For the vast majority of BPO clients, a transition to a new software platform is not appealing. There are more contractual complexities and a broader range of stakeholders (internal and external) involved in negotiations. In most cases, BPO clients look to achieve quicker and larger cost savings through offshoring of delivery staff, leaving any significant IT transformation out of the picture.
Indeed, two of the deals came in unique circumstances. Emap was looking for a new finance and accounting platform, as the part of its business that owned the system had been sold off by its parent. Pearl Group was a strategic deal in which TCS took on the risk of IT transition, treating this as an investment that enabled it to develop a UK platform it could resell to additional L&P clients. As further proof of the difficulty in selling a platform proposition, Sun Life of Canada, TCS's only other UK L&P client win since Pearl, chose to stick with its existing platform rather than use TCS's BaNCS.
Replicating the UK model will be challenging
Mirroring the UK success in new countries will involve significant investment in local sales and delivery teams. The UK is one of the fastest-growing BPO markets, and TCS has already had to invest considerably to kick-start its BPO business there. Achieving the same in the slower-growing continental European markets, such as Germany and France, will arguably cost more.
It's worth noting that, despite its UK success, we estimate TCS's global BPO revenues to have grown by 5% organically - which is hardly groundbreaking. Most of this growth has come from winning smaller deals that rely more on offshore provision than IT platform expertise. TCS is doing the right thing by investing ahead of the curve in platform BPO, but it's going to be a long slog before these investments bring significant returns globally. We expect organic growth of the BPO business to be steady rather than stellar over the next two years.
Showing posts with label UK IT. Show all posts
Showing posts with label UK IT. Show all posts
Saturday, October 24, 2009
Wipro Expands UK Office
LONDON: Wipro Technologies
, the global IT services business of Wipro Limited, announced the expansion of its facility in Reading and opening of a
new office in London.
The center at Reading was inaugurated by The Right Worshipful the Mayor of Reading. This center is an extension of the existing development center facility. This facility will be used for building centers of excellence, delivering customer projects and training purposes.
Speaking on this occasion the Mayor of Reading, Councilor Fred Pugh, said, “It is very encouraging that an international company is ready to invest in Reading in these difficult times. Wipro is a major employer in Reading and a major player in the business community the Council is pledged to support.”
Continuing its business expansion in the UK, Wipro is also inaugurating its new office premises in London. This office would be the headquarters for Wipro’s UK operations. The facility will serve as a sales office with state-of the art infrastructure.
Laxman Badiga, Chief Information Officer, Wipro Technologies said, “Taking on the ownership of the facility at Reading is the first of its kind for Wipro overseas and hence makes this occasion special. The Reading center started with just one floor and had a little over 30 employees when we began. The expansion in Reading and opening of the new office in London has only reinforced our commitment to the region.”
Ayan Mukerji, Head of Europe Operations, Wipro Technologies said, “Today, Wipro has grown to become a leading IT Services company in the UK. Both the centers at Reading and London will be a key hub for recruiting, training of local staff and also gives an opportunity to offer an onsite development center premises to more customers.”
Revenues from Wipro’s European operations account for approx 26% of the IT major’s overall IT Services revenue. UK is one of the key markets for Wipro with a large customer base. The establishment of the new offices will now facilitate Wipro’s growth strategy in the UK and the overall growth in the European region.
, the global IT services business of Wipro Limited, announced the expansion of its facility in Reading and opening of a
new office in London.
The center at Reading was inaugurated by The Right Worshipful the Mayor of Reading. This center is an extension of the existing development center facility. This facility will be used for building centers of excellence, delivering customer projects and training purposes.
Speaking on this occasion the Mayor of Reading, Councilor Fred Pugh, said, “It is very encouraging that an international company is ready to invest in Reading in these difficult times. Wipro is a major employer in Reading and a major player in the business community the Council is pledged to support.”
Continuing its business expansion in the UK, Wipro is also inaugurating its new office premises in London. This office would be the headquarters for Wipro’s UK operations. The facility will serve as a sales office with state-of the art infrastructure.
Laxman Badiga, Chief Information Officer, Wipro Technologies said, “Taking on the ownership of the facility at Reading is the first of its kind for Wipro overseas and hence makes this occasion special. The Reading center started with just one floor and had a little over 30 employees when we began. The expansion in Reading and opening of the new office in London has only reinforced our commitment to the region.”
Ayan Mukerji, Head of Europe Operations, Wipro Technologies said, “Today, Wipro has grown to become a leading IT Services company in the UK. Both the centers at Reading and London will be a key hub for recruiting, training of local staff and also gives an opportunity to offer an onsite development center premises to more customers.”
Revenues from Wipro’s European operations account for approx 26% of the IT major’s overall IT Services revenue. UK is one of the key markets for Wipro with a large customer base. The establishment of the new offices will now facilitate Wipro’s growth strategy in the UK and the overall growth in the European region.
UK to cut spending
Peter Clarke
UK public spending: Prime Minister pledges to protect 'front-line public services'
UK Prime Minister Gordon Brown has spelt out the UK government's policy for public spending until the general election and, if he wins, for the fourth term of the Labour government. Speaking at the Labour Party Conference on Tuesday, and in subsequent interviews, he confirmed that the UK government would cut public spending in order to reduce Britain's fiscal deficit “while maintaining and indeed improving front-line public services.” He claimed this was a caring approach which would protect schools, hospitals and the police. The Prime Minister announced that the government's flagship ID card scheme will be dramatically curtailed.
What will this mean to S/ITS companies?
Gordon Brown did his best to steady the public sector's nerves on the issue of public spending, but has conceded that there will be cuts in spending. Local governments, for example, are assuming that their budgets will be cut between 10% and 20% and are planning their 2010-11 budgets accordingly. Lower public spending reduces opportunities and revenues for S/ITS companies. Suppliers selling into 'front-line services', education, health and social services, the police and armed forces have less to worry about as these services are, for the moment at least, protected by the government's plans. Plans to spend over £1 billion over the two years from September 2010 to provide free care for the elderly (in England) in their own homes could provide a boost for telehealth suppliers. (This has applied to the elderly in Scotland for the past three years.)
The Prime Minister announced a Deficit Reduction Plan aimed at both increasing revenues and controlling expenditure. He said that his government “will raise tax at the very top, cut costs, have realistic public sector pay settlements, make savings we know we can and in 2011 raise National Insurance by half a percent. That will ensure that each and every year we protect and improve Britain's front-line services.” Building the post-recession UK economy as a green economy is seen as a priority.
The Conservatives have been calling for cuts in spending for some months in order to reduce the public sector's deficit, and have already announced that if they win the general election they will not stick to Labour's spending plans but will introduce their own Emergency Budget.
Sticking to the Efficiency Programme
The government has already set out its plans for the next 12 months in the November 2008 pre-budget statement and the 2009 Budget (which announced plans for 3-4% cuts in back-office and IT spending). Each of these built upon the Efficiency Programme that has been in place since 2004. Its focus has been to cut back-office costs to release funds for front-line services. The government has consistently claimed that this is the best way of protecting front-line services. Further details will be announced in November in the pre-budget statement. However, in the current febrile political atmosphere we expect a series of hints and announcements in the intervening weeks. The Chancellor of the Exchequer will announce the parameters for drawing up the Debt Reduction Plan “soon”.
The Prime Minster's announcement takes the government's spending plans beyond the current Efficiency Programme. This will confirm the suspicions of many, especially the opposition in Parliament, who have been pointing out that this is inadequate in the current circumstances. The Prime Minister is now saying that “choices have to be made”. Public sector managers know that this is the signal to prioritise their spending plans. The government wants a well thought out plan for achieving efficiency savings in 2010-11 and beyond.
'Front-line services' will be protected. These are defined as education, the health service, the police and the armed forces. Specifically, the Prime Minister pledged that the three armed forces will “always have all the equipment they need.” He also pledged to increase investment in education, which must mean that the Building Schools for the Future programme is safe.
No detail is available, but delivering these priorities will be a big task as it will involve some of the public sector's biggest budgets. It has become known that despite the Prime Minister's announcements there will be no net increase in public spending, which must mean that there will be even bigger cuts elsewhere.
Some large projects will become sacrificial lambs
The Prime Minster's announcement on ID cards indicates that other large projects could become sacrificial lambs within the Deficit Reduction Plan. Indeed the First Minister, Lord Mandleson, made it clear two weeks ago that nothing was sacrosanct.
UK public spending: Prime Minister pledges to protect 'front-line public services'
UK Prime Minister Gordon Brown has spelt out the UK government's policy for public spending until the general election and, if he wins, for the fourth term of the Labour government. Speaking at the Labour Party Conference on Tuesday, and in subsequent interviews, he confirmed that the UK government would cut public spending in order to reduce Britain's fiscal deficit “while maintaining and indeed improving front-line public services.” He claimed this was a caring approach which would protect schools, hospitals and the police. The Prime Minister announced that the government's flagship ID card scheme will be dramatically curtailed.
What will this mean to S/ITS companies?
Gordon Brown did his best to steady the public sector's nerves on the issue of public spending, but has conceded that there will be cuts in spending. Local governments, for example, are assuming that their budgets will be cut between 10% and 20% and are planning their 2010-11 budgets accordingly. Lower public spending reduces opportunities and revenues for S/ITS companies. Suppliers selling into 'front-line services', education, health and social services, the police and armed forces have less to worry about as these services are, for the moment at least, protected by the government's plans. Plans to spend over £1 billion over the two years from September 2010 to provide free care for the elderly (in England) in their own homes could provide a boost for telehealth suppliers. (This has applied to the elderly in Scotland for the past three years.)
The Prime Minister announced a Deficit Reduction Plan aimed at both increasing revenues and controlling expenditure. He said that his government “will raise tax at the very top, cut costs, have realistic public sector pay settlements, make savings we know we can and in 2011 raise National Insurance by half a percent. That will ensure that each and every year we protect and improve Britain's front-line services.” Building the post-recession UK economy as a green economy is seen as a priority.
The Conservatives have been calling for cuts in spending for some months in order to reduce the public sector's deficit, and have already announced that if they win the general election they will not stick to Labour's spending plans but will introduce their own Emergency Budget.
Sticking to the Efficiency Programme
The government has already set out its plans for the next 12 months in the November 2008 pre-budget statement and the 2009 Budget (which announced plans for 3-4% cuts in back-office and IT spending). Each of these built upon the Efficiency Programme that has been in place since 2004. Its focus has been to cut back-office costs to release funds for front-line services. The government has consistently claimed that this is the best way of protecting front-line services. Further details will be announced in November in the pre-budget statement. However, in the current febrile political atmosphere we expect a series of hints and announcements in the intervening weeks. The Chancellor of the Exchequer will announce the parameters for drawing up the Debt Reduction Plan “soon”.
The Prime Minster's announcement takes the government's spending plans beyond the current Efficiency Programme. This will confirm the suspicions of many, especially the opposition in Parliament, who have been pointing out that this is inadequate in the current circumstances. The Prime Minister is now saying that “choices have to be made”. Public sector managers know that this is the signal to prioritise their spending plans. The government wants a well thought out plan for achieving efficiency savings in 2010-11 and beyond.
'Front-line services' will be protected. These are defined as education, the health service, the police and the armed forces. Specifically, the Prime Minister pledged that the three armed forces will “always have all the equipment they need.” He also pledged to increase investment in education, which must mean that the Building Schools for the Future programme is safe.
No detail is available, but delivering these priorities will be a big task as it will involve some of the public sector's biggest budgets. It has become known that despite the Prime Minister's announcements there will be no net increase in public spending, which must mean that there will be even bigger cuts elsewhere.
Some large projects will become sacrificial lambs
The Prime Minster's announcement on ID cards indicates that other large projects could become sacrificial lambs within the Deficit Reduction Plan. Indeed the First Minister, Lord Mandleson, made it clear two weeks ago that nothing was sacrosanct.
Monday, September 14, 2009
BT to cut back Graduate Trainee Intake
BT has become one of the first blue-chip companies to scrap its graduate recruitment scheme, increasing fears of shrinking job opportunities for Britain’s youth.
In a memo sent to staff last week and seen by The Sunday Times, BT said: “In light of the economic environment and headcount pressures, BT has taken the decision to cease graduate recruitment activity . . . there is no timeline for re-entry.”
The closure will add fuel to concerns over Britain’s “lost generation” of young people struggling to find work. Statistics last week showed that a record 835,000 people aged between 18 and 24 in England were not in work, education or training — a year ago the figure was 730,000.
The increased popularity of flagship recruitment schemes leaves more graduates fighting over fewer places. BT received 4,800 applications last year for 130 jobs, up from 3,800 just two years ago.
Related Links
* Former polytechnics beat Oxbridge for jobs
* Graduate unemployment hits ten year high
The company has recruited several of its top executives through the graduate scheme. Hanif Lalani, the head of BT’s Global Services arm, joined as a trainee in 1983 after attending Essex University. His successor as group finance director, Tony Chanmugam, was taken on in 1978 via a similar route.
However, the move shows that BT chief executive Ian Livingston is tackling the company’s cost base. He has already pledged to cut 30,000 jobs in two years and wants hundreds of workers to take a sabbatical in exchange for a 25% pay cut.
BT has said it is committed to this year’s graduate intake and will support those already in the scheme.
In a memo sent to staff last week and seen by The Sunday Times, BT said: “In light of the economic environment and headcount pressures, BT has taken the decision to cease graduate recruitment activity . . . there is no timeline for re-entry.”
The closure will add fuel to concerns over Britain’s “lost generation” of young people struggling to find work. Statistics last week showed that a record 835,000 people aged between 18 and 24 in England were not in work, education or training — a year ago the figure was 730,000.
The increased popularity of flagship recruitment schemes leaves more graduates fighting over fewer places. BT received 4,800 applications last year for 130 jobs, up from 3,800 just two years ago.
Related Links
* Former polytechnics beat Oxbridge for jobs
* Graduate unemployment hits ten year high
The company has recruited several of its top executives through the graduate scheme. Hanif Lalani, the head of BT’s Global Services arm, joined as a trainee in 1983 after attending Essex University. His successor as group finance director, Tony Chanmugam, was taken on in 1978 via a similar route.
However, the move shows that BT chief executive Ian Livingston is tackling the company’s cost base. He has already pledged to cut 30,000 jobs in two years and wants hundreds of workers to take a sabbatical in exchange for a 25% pay cut.
BT has said it is committed to this year’s graduate intake and will support those already in the scheme.
UK Grads find it difficult to get work
The UK's IT graduates could find it even more difficult to obtain work if new government proposals making it easier for multinational companies to transfer non-European Union graduates to UK offices take effect.
The Association of Professional Staffing Companies (APSCo) said that the Home Office's Migration Advisory Committee had proposed reforms to the current point-based system which would allow the graduates to become eligible for intra-company transfers.
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The transfers would be available to graduates from non-EU companies after just three months of employment at the sponsoring organisation, without that firm having to advertise vacancies in the UK first, according to APSCo.
Under a Freedom of Information request APSCo found that 29,240 non-EU IT workers came into the UK in 2008 on intra-company transfers, more than double the 14,255 non-EU workers coming into the UK to work in all the other professional service sectors combined.
"While the intra-company transfer system might not be exploited in the financial and legal sectors, there is evidence that it is being exploited in the IT sector," said APSCo chief executive Ann Swain.
"Using the system to bring in graduates would be wrong-headed and illogical. Employers should be required by law to advertise vacancies in the UK first before transferring employees from overseas offices. We are disappointed that the Migration Advisory Committee is not recommending that this loophole be closed."
The Association of Professional Staffing Companies (APSCo) said that the Home Office's Migration Advisory Committee had proposed reforms to the current point-based system which would allow the graduates to become eligible for intra-company transfers.
Advertisement
The transfers would be available to graduates from non-EU companies after just three months of employment at the sponsoring organisation, without that firm having to advertise vacancies in the UK first, according to APSCo.
Under a Freedom of Information request APSCo found that 29,240 non-EU IT workers came into the UK in 2008 on intra-company transfers, more than double the 14,255 non-EU workers coming into the UK to work in all the other professional service sectors combined.
"While the intra-company transfer system might not be exploited in the financial and legal sectors, there is evidence that it is being exploited in the IT sector," said APSCo chief executive Ann Swain.
"Using the system to bring in graduates would be wrong-headed and illogical. Employers should be required by law to advertise vacancies in the UK first before transferring employees from overseas offices. We are disappointed that the Migration Advisory Committee is not recommending that this loophole be closed."
Thursday, September 10, 2009
Tough for Indian IT Pros in UK
Bangalore: The UK government has accepted recommendations for stricter immigration norms and restricting job opportunities for skilled migrant workers from countries like India, reports Economic Times.
The Migration Advisory Committee (MAC) report submitted by the committee's Chairman, Professor David Metcalf to UK's Home Office last month recommended that the threshold salary levels for allowing entry of a graduate skilled worker be raised from the current 17,000 pounds. This will make it tougher to earn points needed for allocation of work permits.
With more stringent norms, companies like TCS, Infosys, Wipro and Tech Mahindra which serve British customers such as BT, British Petroleum and British Airways by sending Indian professionals to the country on short term project assignments, may now have to look for local UK workers.
"These changes will ensure that businesses can recruit the skilled workers that the economy needs, but not at the expense of British workers, nor as a cheaper alternative to investing in the skills of the existing workforce," Home Secretary Alan Johnson said in a statement issued by the UK Border Agency. He also added that the threshold of income at which migrant workers become eligible for work permits will now be raised to 20,000 pounds.
As per rules, companies will need to advertise for available positions for four weeks before employing migrant workers. "This will mean that, from next year, all jobs must be advertised to British workers in Jobcentre Plus for four weeks - extended from two weeks - before companies can seek to employ individuals from outside Europe. This will ensure that British workers not only are first in line for jobs but also have more time in which to apply," the Home Office said.
MAC's recommendations for tougher intra-company transfer rules - a route adopted by many tech firms for sending Indian workers to work with customers onsite in the country, have also been accepted.
The Migration Advisory Committee (MAC) report submitted by the committee's Chairman, Professor David Metcalf to UK's Home Office last month recommended that the threshold salary levels for allowing entry of a graduate skilled worker be raised from the current 17,000 pounds. This will make it tougher to earn points needed for allocation of work permits.
With more stringent norms, companies like TCS, Infosys, Wipro and Tech Mahindra which serve British customers such as BT, British Petroleum and British Airways by sending Indian professionals to the country on short term project assignments, may now have to look for local UK workers.
"These changes will ensure that businesses can recruit the skilled workers that the economy needs, but not at the expense of British workers, nor as a cheaper alternative to investing in the skills of the existing workforce," Home Secretary Alan Johnson said in a statement issued by the UK Border Agency. He also added that the threshold of income at which migrant workers become eligible for work permits will now be raised to 20,000 pounds.
As per rules, companies will need to advertise for available positions for four weeks before employing migrant workers. "This will mean that, from next year, all jobs must be advertised to British workers in Jobcentre Plus for four weeks - extended from two weeks - before companies can seek to employ individuals from outside Europe. This will ensure that British workers not only are first in line for jobs but also have more time in which to apply," the Home Office said.
MAC's recommendations for tougher intra-company transfer rules - a route adopted by many tech firms for sending Indian workers to work with customers onsite in the country, have also been accepted.
Saturday, August 22, 2009
IT Spending to fall faster
Spending on software and IT services will fall by 1.3 per cent to £39.5bn in 2009, according to figures from Pierre Audoin Consultants (PAC) and TechMarketView.
The figures are slightly worse than the one per cent decline forecast early in the year.
Many UK organisations have either frozen or cut their discretionary IT budgets, driving a 3.9 per cent drop in software investment and a 5.5 per cent decrease in project services spending.
The decline will be partially offset by a 3.1 per cent rise in outsourcing spend, as businesses aim to reduce their IT operating costs and focus on core, strategic activities.
Nick Mayes, analyst at PAC London, said the pipeline of new contract opportunities is expanding slowly, although clients continue to negotiate aggressively with suppliers.
"However, large suppliers with mature global delivery networks, intimate client relationships and annuity-based outsourcing businesses continue to fare better, as evident in the results of Logica, Atos Origin and Capgemini," he said.
The public sector remains the biggest spender on software and IT services, representing nearly 25 per cent of the UK market. It is also due to grow by 4.3 per cent this year to support border control and defence initiatives.
Spending under a prospective Tory government would not necessarily slow, according to Anthony Miller, managing partner at TechMarketView.
“There may well be a hiatus in kicking off new government IT projects pending the election,” he said.
“But whichever colour of party we see in government next year, we expect that the pace of outsourcing – and, dare we say, offshoring – will undoubtedly increase, more so with the Tories."
The industry sectors that will cut software and IT services investment the most severely this year are retail, services and manufacturing.
The figures are slightly worse than the one per cent decline forecast early in the year.
Many UK organisations have either frozen or cut their discretionary IT budgets, driving a 3.9 per cent drop in software investment and a 5.5 per cent decrease in project services spending.
The decline will be partially offset by a 3.1 per cent rise in outsourcing spend, as businesses aim to reduce their IT operating costs and focus on core, strategic activities.
Nick Mayes, analyst at PAC London, said the pipeline of new contract opportunities is expanding slowly, although clients continue to negotiate aggressively with suppliers.
"However, large suppliers with mature global delivery networks, intimate client relationships and annuity-based outsourcing businesses continue to fare better, as evident in the results of Logica, Atos Origin and Capgemini," he said.
The public sector remains the biggest spender on software and IT services, representing nearly 25 per cent of the UK market. It is also due to grow by 4.3 per cent this year to support border control and defence initiatives.
Spending under a prospective Tory government would not necessarily slow, according to Anthony Miller, managing partner at TechMarketView.
“There may well be a hiatus in kicking off new government IT projects pending the election,” he said.
“But whichever colour of party we see in government next year, we expect that the pace of outsourcing – and, dare we say, offshoring – will undoubtedly increase, more so with the Tories."
The industry sectors that will cut software and IT services investment the most severely this year are retail, services and manufacturing.
Outsourcing faces new era of scrutiny
Outsourcing faces new era of scrutiny
LONDON (Reuters) – Outsourcing, Indian-style, is challenged as never before by an erosion in business confidence that makes corporate spending, even to generate quick cost-savings, harder to justify.
“No New Investment” is the order of the day; cost avoidance, the mantra; zero percent, the growth target in the current era of uncertainty.
Software service providers emerged out of the 2000-2002 technology spending bust with sales growing up to 50 percent a year as they won over companies to contract out inefficient operations instead of managing them in-house.
But shocks to the world economy seen over the past 18 months are triggering reassessments of corporate growth expectations, cost considerations and operational accountability. It’s no longer safe to assume that the logic that drove outsourcing in the past will drive it again, once the economy picks up.
Here are reasons why the industry will find it difficult to repeat its past performance in the tough times ahead.
CUTTING BACK ON COST-CUTTING: The paradox at the moment is that spending on services meant to cut costs and save money is itself being squeezed.
Technology Partners International (TPI), a research firm that has tracked the outsourcing industry for 20 years, reported this week that total contract volumes fell 22 percent in the fourth quarter from a year ago.
Just how bad things could get this year is only likely to emerge as corporate customers nail down their 2009 spending plans to vendors in the next two to three months.
“The worst of the IT (information technology) spending slowdown likely remains in front of us as we start the clock on slashed 2009 budgets,” Goldman Sachs warned in a report on the software industry earlier this month.
The conventional wisdom is that companies will eventually need to cost-cut their way out of the economic morass. But as the software services industry has matured over this decade, Goldman analysts say the sector has become more cyclically dependent on overall IT spending, reducing the chances it will be an early winner in any corporate recovery.
Tata Consultancy Services, the largest of the Indian software service providers, estimates that budgets for IT outsourcing will fall between 5 and 20 percent during 2009. Market forecasters predict more declines in store for 2010.
KEY CUSTOMERS IN TROUBLE. One problem is that the $40 billion-a-year industry’s fortunes are heavily linked to the financial sector. Indeed outsourcing started out 30 years ago as a way to help banks automate tangled back-office operations.
But while it grew more diverse in the 1990s, branching into telecom, manufacturing, retail and other industries; banks, brokerages and insurers are still the biggest slice of the market at 20 percent of overall sales, Goldman Sachs estimates.
The finance sector is not just in trouble, it is experiencing a meltdown like no other since the 1970s or perhaps even the 1930s — long before outsourcing itself was invented. And while the credit crisis has left many institutions needing to slash costs, we are seeing a wholesale contraction of the market that will lead to steep reductions in overall demand. Whole parts of the business will disappear and not be replaced.
Moreover, the financial industry’s reliance on governments for bailouts has curtailed the autonomy of bosses. Governments are likely to be dubious should big banks and insurers seek to offshore financial jobs, especially in countries with mounting unemployment. Outsourcers may have to get used to having fewer, and more conservative, financial services customers.
LONDON (Reuters) – Outsourcing, Indian-style, is challenged as never before by an erosion in business confidence that makes corporate spending, even to generate quick cost-savings, harder to justify.
“No New Investment” is the order of the day; cost avoidance, the mantra; zero percent, the growth target in the current era of uncertainty.
Software service providers emerged out of the 2000-2002 technology spending bust with sales growing up to 50 percent a year as they won over companies to contract out inefficient operations instead of managing them in-house.
But shocks to the world economy seen over the past 18 months are triggering reassessments of corporate growth expectations, cost considerations and operational accountability. It’s no longer safe to assume that the logic that drove outsourcing in the past will drive it again, once the economy picks up.
Here are reasons why the industry will find it difficult to repeat its past performance in the tough times ahead.
CUTTING BACK ON COST-CUTTING: The paradox at the moment is that spending on services meant to cut costs and save money is itself being squeezed.
Technology Partners International (TPI), a research firm that has tracked the outsourcing industry for 20 years, reported this week that total contract volumes fell 22 percent in the fourth quarter from a year ago.
Just how bad things could get this year is only likely to emerge as corporate customers nail down their 2009 spending plans to vendors in the next two to three months.
“The worst of the IT (information technology) spending slowdown likely remains in front of us as we start the clock on slashed 2009 budgets,” Goldman Sachs warned in a report on the software industry earlier this month.
The conventional wisdom is that companies will eventually need to cost-cut their way out of the economic morass. But as the software services industry has matured over this decade, Goldman analysts say the sector has become more cyclically dependent on overall IT spending, reducing the chances it will be an early winner in any corporate recovery.
Tata Consultancy Services, the largest of the Indian software service providers, estimates that budgets for IT outsourcing will fall between 5 and 20 percent during 2009. Market forecasters predict more declines in store for 2010.
KEY CUSTOMERS IN TROUBLE. One problem is that the $40 billion-a-year industry’s fortunes are heavily linked to the financial sector. Indeed outsourcing started out 30 years ago as a way to help banks automate tangled back-office operations.
But while it grew more diverse in the 1990s, branching into telecom, manufacturing, retail and other industries; banks, brokerages and insurers are still the biggest slice of the market at 20 percent of overall sales, Goldman Sachs estimates.
The finance sector is not just in trouble, it is experiencing a meltdown like no other since the 1970s or perhaps even the 1930s — long before outsourcing itself was invented. And while the credit crisis has left many institutions needing to slash costs, we are seeing a wholesale contraction of the market that will lead to steep reductions in overall demand. Whole parts of the business will disappear and not be replaced.
Moreover, the financial industry’s reliance on governments for bailouts has curtailed the autonomy of bosses. Governments are likely to be dubious should big banks and insurers seek to offshore financial jobs, especially in countries with mounting unemployment. Outsourcers may have to get used to having fewer, and more conservative, financial services customers.
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