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
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
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 nearshore 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.
Muted growth, operational streamlining and increased offshoring are the
Next let’s move on to the Indian Offshorers.
We’ll begin with the Tier 1 players. TCS’ quarterly revenues remained flat
year on year, in sharp contrast to the 25 percent growth last quarter and its
statement that it does not expect revenue to be impacted by the turmoil. Net
profit declined 18 percent. It is witnessing pricing pressure on new
contracts, but on a positive note, net employee addition was more than
8,500—its highest in the past few quarters.
Infosys’ quarterly revenues grew by 8 percent compared to 19 percent the
previous quarter, and it added about 2,800 employees. Management stated that
the velocity of business has come down, decision-making is slow, budgets are
not finalized and scrutiny is higher.
Wipro reported a 12 percent annual increase in IT service revenues and its
margins diminished. It also reduced its IT services headcount by more than
HCL technologies saw an 11 percent revenue growth, boosted by
acquisitions. Net income was down 9 percent and total employee count was
almost flat. HCL stated that “the pricing environment is quite bad and
customers are saying that we should contribute and help in reducing their
spend on IT”.
The best performer was Cognizant which reported a 25 percent increase in
revenue and a 34 percent increase in profits. It even saw a 19 percent
increase in its financial services segment, and added 2,200 employees during
the quarter. On the flip side though, the company’s outlook for 2009 is a 10
percent revenue growth and broadly flat margins.
It is a significant shift from the position last quarter. Tier 1 players
have seen their growth rates tumble (Cognizant is an exception here) and
visibility become poorer. Operationally though, they are adjusting well and
focusing on working with customers to address their challenges. Currency
fluctuations remain a cause of concern for them, and ‘constant currency
basis’ is the new buzzword.
Moving on to the Indian Tier 2 players. Growth rates for the leaders last quarter
has come down from 30 percent plus to 20 percent for Mindtree and 17 percent
for TechMahindra. Mindtree suffered significantly on the profitability front
with a 88 percent decline in profit after tax. Talking about variability in
performance, Polaris saw 32 percent revenue growth while Patni saw a 1
percent revenue growth, and a 45 percent decline in profitability.
Finally, the Indian Tier 3 players. Hexaware saw flat reported revenues
but a significant improvement in operational efficiency and resulting
profitability. It continued on its headcount reduction spree with 300
reductions last quarter, taking the tally to about 1,000 reductions over two
quarters. Sonata, whose revenues rose by 25 percent and who did not foresee
any adverse impact, saw its growth come down to 7 percent, even though
profitability increased 27 percent.
So high variability in Tier 2 and 3 segments but they are now feeling the
full impact and their irrational exuberance is fading away. Realistic growth
rates, pricing pressures, currency effects, project cancellations/deferrals
and longer sales cycles are being evidenced among the players.
How does all the evidence compare with my original assertion five months
ago? Well the evidence broadly supports the assertions—players are
witnessing pricing pressures, reduced profitability, (much) less growth
compared to golden times and an imperative to deliver tangible business value
However, I do recognize now that there are exceptions and in some cases,
the ability to withstand the macro environment and make corrective
adjustments has been, frankly speaking, quite impressive. Special mention
must be made of the increased use of offshoring by global and European
outsourcers, and the emphasis on productivity and delivering value by select
Indian players. We will see an increased use of offshoring, no doubt, but in a rational,
rather than blind, way. It’s fair to say that the recession is wiping away
the inefficiencies of the system. Those who recognize and adapt will be the
Arpit Kaushik runs the London-based outsourcing service design firm,
Crystals, that helps forward-looking companies to realise the promised
benefits of outsourcing.