Indian outsourcers see a turnaround ahead

They will have to build new expertise and expand globally, say analysts

The market for Indian outsourcers is on the mend, but these companies will have to build expertise in new technology areas, and set up operations in multiple locations to take advantage of market conditions, according to analysts.

A number of new large deals are expected to be signed by the second quarter of this year, Sudin Apte, principal analyst at Forrester Research, said on Wednesday. Indian companies are however not likely to achieve soon the revenue growth levels they had before the recession, he said.

By a rough estimate, the maximum revenue growth Indian companies could reach by March 31, 2011, the end of the next Indian fiscal year, would be about 15 to 17 percent, Apte said. Top Indian outsourcing companies like Infosys Technologies and Tata Consultancy Services (TCS) posted revenue growth rates of over 30 percent in the fiscal year to March 31, 2008.

An indication of the turnaround came from Infosys, India's second largest outsourcer. The company said on Tuesday that its revenue for the quarter ended Dec. 31 had grown by 5.2 percent in U.S. dollar terms compared to the same quarter in the previous year. Profit growth was however flat at 0.6 percent.

Infosys had posted a decline in revenue and profits in the previous quarter. On Tuesday the company also revised upwards its outlook for the current fiscal year ending March 31.

Tata and Wipro are also expected to announce an improvement in their revenue and increased hiring of staff later this month when they announce their results for the quarter ended Dec 31.

The current quarter is likely to be better than the last one for Indian outsourcers, said Diptarup Chakraborti, principal research analyst at Gartner.

The pick-up in business so far has mainly come from necessary or maintenance expenditure rather than discretionary expenditure on IT, Chakraborti said. Some of the maintenance expenditure had been prioritized, and the rest cut during the recession, he said.

Business from discretionary expenditure is likely to come only by the middle of the year, Chakraborti added.

There are also large opportunities ahead for Indian outsourcers in the domestic market, according to Chakraborti. The Indian market is forecast to grow by 19 percent in 2010 to around US$8 billion, he added.

Both Gartner and Forrester have forecast a pick-up in IT spending this year. Global IT spending, which dropped 8.9 percent last year, will rise 8.1 percent in 2010 to more than $1.6 trillion (T), Forrester said Tuesday. Purchases of IT consulting and systems integration services will grow by 6.8 percent in U.S. dollar terms, while IT outsourcing services will be 7.1 percent higher, it added.

As spending on IT increases, there will be more opportunities for Indian outsourcing companies, Chakraborti said.

India will be a preferred location as customers in the U.S. and Europe look to cut costs, said Apte. But Indian companies will have to be willing to explore a variety of engagement and pricing models with the customer, he added.

To take advantage of upcoming opportunities, Indian companies will also have to invest in a variety of new technologies like cloud computing and green computing, said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International (TPI). Customers will expect their providers to be able to help them make the transition to the new technologies, he added.

The cloud computing trend will also determine how outsourcers will deliver services to customers, throwing up new business models, Pai said.

Indian outsourcers will also have to start looking like global companies with the ability to service their clients from multiple locations, according to Pai.

These companies will also face increasing competition from multinational services companies like IBM and Accenture that have set up operations in India to tap low-cost talent in the country, Pai added. Customers planning to outsource to India will evaluate both Indian companies as well as multinational companies with operations in India, he added.

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