Offshore Outsourcing and Economic Recession: Impact on Global, Indian and European Outsourcers

Financial analysis of the impact of the U.S. recession so far on global and offshore outsourcers based on reported revenues and bookings.

A few weeks ago I was at an offshore group meeting, and a debate started on the impact of recession on outsourcing. Overall verdict was that a recession will not derail offshoring and, in fact, may even significantly increase demand for offshoring. I was still left unsure about it so I thought why not get to the heart of the matter, look at the financial results and outcome from the various categories of offshore outsourcers and then, let everyone decide for themselves about what's really going on.

Global Outsourcers

In its latest quarter, Accenture's outsourcing revenues were up 15 percent year on year and its outsourcing bookings were at their highest in more than four years. On its guidance for 2009, the CEO quoted on the macro environment "It's not going to all fall into place. It's not even going to be pretty". But despite that, Accenture has maintained its growth guidance and expects to improve its outsourcing profitability in '09. IBM's strategic outsourcing business grew 8 percent last quarter, fuelled by 21 percent growth in revenues from growth markets. However, long-term signings continued to fall. Going forward, IBM expects similar growth in the next quarter. HP's outsourcing revenues grew 15 percent, and the division had its best quarter in history with record profitability, and significant new wins. While not specific to outsourcing, HP was candid enough to say that "we don't know how the economy will evolve, but at this point we are expecting the market to be challenging in 2009". CSC's outsourcing revenues increased 6 percent in the last quarter, and doubled its new order bookings. However, it reduced its onshore headcount by 2,300 and increased its Indian headcount by 3,000.

Overall, the global outsourcers seem to be in fine shape, especially Accenture and HP, and are not too worried about the future. Headcount realignment and higher offshore mix are being evidenced here.

European outsourcers

Atos Origin's revenues declined 6 percent, but it maintained its annual organic growth guidance. It recently brought in a new CEO to "overcome the challenges of the current economic environment". Logica's revenues grew 7 percent, and raised its full year revenue guidance to 4 percent. However, it expects European economies to face the downturn in 2009 and consequently has planned for a modest growth in 2009. Capgemini's outsourcing revenues increased 9 percent. Higher offshore mix and focus on cost reductions has been evidenced.

So overall, low growth (but they are used to it anyway) expected in 2009, but no major concerns in Europe.

Indian Outsourcers

Let's start with Tier 1. TCS reported a 25 percent increase in quarterly revenues. Surprisingly, it exhibited growth in the financial services segment, and does not expect revenue to be impacted by the turmoil, including in other verticals. Pricing was stable and net employee additions was more than 5,000, its highest in the past four quarters!

Infosys' quarterly revenues increased 19 percent, and it added 6,000 employees in the quarter. However, it cut its full year revenue guidance by 6 percent, attributed to currency and macro environment.

Wipro reported a 23 percent annual increase in IT service revenues. However, it added only 352 employees (net) in that business during the quarter. Wipro was probably the most honest (or conservative—you decide) in terms of outlook for the future: It indicated slower contract closures, ramping down of a few clients, 2 percent revenue reduction due to the turmoil, and potential pricing decline in the coming quarter.

HCL technologies saw an 18 percent revenue growth (the lowest amongst the biggies), and a 2 percent decline in net income. Net of attrition, about 2,000 employees were added in the quarter. Management indicated a budget freeze by customers and expects some clarity only by the January 2009 timeframe.

Satyam reported a strong 39 percent growth in revenues, but reduced its full-year USD guidance by 4 percent. Headcount addition guidance was also reduced by about 40 percent. Satyam echoed the observation that while theoretically, current pressures to cut costs should result in increased offshoring, in reality, that's not happening. Reason cited is hesitation by clients due to current economic uncertainty.

Cognizant saw its revenues increase 31 percent (despite having 45 percent of its revenues from the financial services segment) and the company maintained its full year outlook of 32 percent growth. On the flip side, management did admit to low visibility in the short term, and said that clients' budget-making process should get postponed by two to three months.

Barring a couple of exceptions, certain themes are common across Tier 1 players: growth rates much lower than the 35 to 40 percent witnessed previously, talks about large transformational deals, higher offshore content in projects and a slight shift from time and material to fixed price projects.

Let's go on to the Indian Tier 2 players. A high degree of variability exists here: from a 30 percent plus growth from companies like MindTree and TechMahindra to a muted 8 percent growth from Patni. MindTree and Polaris are both quite bullish still, while Patni has reduced its guidance owing to a general build-up of deferred decisions of cancelled projects. TechMahindra, the poster-boy of Telecom outsourcing has started seeing pressure in its business from BT, and NIIT is seeing IT career concerns among students in India. In general, companies have indicated a flat headcount growth. Polaris is seeing nice-to-have projects going/gone away, and must-have projects being tightened.

Finally, the Indian Tier 3 players. Hexaware saw a 16 percent rise in revenue but a 57 percent drop in net profit due to loss in forex hedges. Significant issues for almost all players in the industry are currency movement and forex hedges. Hexaware is cautiously optimistic and has pointed to declining headcount, some pricing pressure, a circumspect approach from some clients and a two tough quarters. Sonata, an outsourcer with significant revenues from the travel vertical, saw its revenues rise by 25 percent. Though it has seen decision cycles elongate, it is quite comfortable with its outlook and does not have any adverse expectations.

Most in the Tier 2 and 3 segments are feeling the impact and expect the effect of the recession to increase, while some haven't show evidence of that impact as yet. Growth rates, however, have been lowered to more realistic levels.

What It Means for Offshoring, So Far

To summarize, one quarter into the economic crisis, the offshore outsourcers have held on well, and are making the adjustments they need to make. It's not panic time as yet. However, the boom in offshore outsourcing that some predicted the crisis will bring, has not happened and is not expected to happen either. We are living in interesting times, and I eagerly look forward to the next round of quarterly results...that will give a clearer indication of how recession has actually impacted the offshore outsourcers. Until then, keep your fingers crossed...

Copyright © 2008 IDG Communications, Inc.

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