Offshore Outsourcing and Economic Recession: Impact on Global, Indian and European Outsourcers (part 2)
An updated financial analysis of the impact of the U.S. recession so far on offshore outsourcing firms based on reported revenues and bookings.
CIO — Recently, I decided to take a look at the impact of recession on offshore outsourcing: that the players will face pricing pressures, reduced profitability and less growth compared to the golden times, and that there will be an imperative to deliver tangible business value to customers. I looked for evidence in the quarterly results of outsourcers and, despite the absence of the predicted boom, I found that they had held on pretty well. And I decided to reexamine the results after another quarter passed.
First up, the global outsourcers. In its latest quarter, Accenture's outsourcing revenues were up 7 percent year on year and its outsourcing margins increased due to more work shifting offshore. Management said that they have not witnessed any change in cancellations or deferrals, and now see the period of indecision starting to break loose. They also see an increased demand for BPO and application outsourcing services. The growth rate, it should be noted, is half of the previous quarter. IBM's strategic outsourcing business saw a 3 percent decline in revenues but an improvement in margins. On a like-to-like basis HP's services revenues declined 15 percent, but like IBM, it did see an increase in margins. HP saw a significant decline in its application services business as discretionary project work fell away. CSC also saw its outsourcing revenues decline by 13 percent, attributed to client delays and pull back of discretionary projects. Outsourcing bookings during the quarter were also down 50 percent, but like the others, it did improve its profitability.
Overall, since last quarter, the exuberance about revenue growth has become quite muted now. On the positive side, companies are improving profitability and streamlining their operations, including increased reliance on offshoring.
In the European outsourcers category, Capgemini saw its quarterly organic outsourcing revenues increase by 3 percent year on year (overall growth was 1 percent), but its outsourcing bookings declined by 37 percent. During the last quarter it increased its offshore headcount by over 1,200 (compared to an increase of 50 for onshore). Profits improved marginally but the company said that it can't see business with any real confidence beyond June, guiding towards a modest first half 2009 revenue and a margin decline. Logica's Q4 revenues went down 11 percent, and its operating profit for the full year declined 22 percent. It has been making aggressive strides into offshoring and boosted nearsho re and offshore headcount to 5,000 (2009 target is 8,000), adding 900 employees in six months at its new India center. Logica sees good demand with more, larger outsourcing opportunities in the pipeline, but has forecast flat first-half sales. Atos Origin's Q4 revenues declined 9 percent, and it expects a slight decrease ("roughly minus 2 percent or something like that") in 2009 revenue. It also plans to increase offshore headcount by 1,000, while reducing onshore headcount.
