There is a new sense of urgency among many US and European IT services companies as they come to appreciate just how proven the offshore outsourcing model has become. Even as they ‘re-size’ their activities ‘onshore’, many traditional services companies, such as Cap Gemini Ernst &Young and BT, are rapidly building up their capabilities for handling IT projects and outsourced business processes through low-cost development and service teams in India, China and other so-called developing countries. And a sense of urgency is what is needed given the financial performances of companies that specialise in offshore outsourcing.
Offshore services leaders, such as Infosys Technologies, Cognizant, Tata, Satyam and Wipro, have all recorded phenomenal results in recent quarters as their cost models prove irresistible to IT directors in the West and as concerns about quality assurance and high-speed communications have evaporated. While their counterparts in Europe have been cutting headcount, these offshore specialists have been adding, on average, 1,000 workers a quarter. And they have been delivering the revenue growth profile to justify that.
In the closing quarter of its fiscal 2003, ending 31 March, Infosys reported revenues up a stunning 55% to $216.0 million, and net profits that rose to $53.1 million from $42.3 million in the fourth quarter of 2002.The company said it added 1,300 ‘Infoscions’ to its workforce of 14,000 during the quarter, and is predicting it will grow by between 25% and 28% in the coming year to attain revenues of between $946 million and $963 million. “The global delivery model has become mainstream as offshore outsourcing gains momentum,” says a triumphant Nandan Nilekani, CEO of Infosys.
Though reticent to publicise the identify of its clients, Infosys highlighted that it has completed the launch of a new client account analysis and reporting tool for one of the world’s largest private banking businesses, and that among the 28 customers in signed up in the quarter was the North American subsidiary of a global insurance broker, which engaged Infosys to develop policy management and premium account functions. Alongside it, Wireless telecoms company Nextel Partners has commissioned Infosys to test its new billing software.
Cognizant, too, is seeing phenomenal success, especially in the financial services sector. Revenues for its first quarter to the end of March soared 60% to $74.5 million, with 47% of that coming from services organisations. That helped improve profitability, with net income rising to $10.2 million from $7.1 million in the year-ago period. Contradicting perceptions that offshore outsourcing companies are fuelled solely by one-off contracts, Cognizant says that 80% of its business is now with customers who have been existing clients for over a year.
That profile is helping Cognizant win major recognition. Most notably, the investors’ bible Forbes magazine last month put the company at number 15 in its list of the 25 fastest-growing technology companies.
That does not suggest that there are no financial pressures on such companies. In India, for example, increasingly intense competition for contracts is squeezing margins. Financial analysts in the country suggest that billing rates, which currently stand at about $25 an hour for software developers at companies such as Wipro and Satyam, could fall as low as $10.
Those are economic pressures that Western companies that are relatively late into offshore outsourcing can – and possible need to – exploit. And Accenture is one case in point.
Net revenues at the world’s third largest IT services company fell 3% to $2.83 billion in the company’s second quarter to the end of March, although the strengthening of the euro against the dollar over the period meant that actually represented a 9% decrease in local currencies. Net income bounced back to $118.7 million, up from $10.6 million in the year-ago quarter when the company wrote off $211 million in failed dot-com investments.
Over the past two years, as customer demand patterns have changed, Accenture has been trying to scale down the proportion of revenue it derives from consulting and replace that with a larger contribution from outsourcing contracts. In the most recent quarter, outsourcing accounted for $828 million in net revenues, an increase of 33% over the revenues in the same quarter a year ago and now representing 29% of revenues.
Despite a 15% decline in business, the core consulting side of the business continues to contribute the lion’s share of revenues. The $2 billion from consulting in the second quarter amounted to 70% of the overall revenue pie.
Geographically, revenues in the Europe, Middle East and Africa (EMEA) region were up 2% to $2.62 billion, but down 13% when calculated in local currencies. Business in the Americas was down 9% to $2.74 billion – a 6% decline in local currencies. The Asia Pacific was flat at $397.9 million.
Despite that erosion, CEO Joe Forehand believes that the trading environment is improving. He cited as proof the strong growth in new contract bookings during the quarter of $4.75 billion, its second highest ever figure. However, that looks sluggish compared to the performance at Accenture’s biggest rival, IBM Global Services.
IBM said it booked $12 billion of contracts in the company’s first quarter to 31 March, helping IBM Global Services lift its revenues by a stunning 24% to $10.12 billion. The bulk of that increase, however, came from the folding of its acquisition, PricewaterhouseCoopers, into the company, an act that boosted IBM’s business consulting services revenues by 63%.
But outsourcing revenues were hardly sluggish, up 13%, while IBM GS’s ‘integrated technical services’ also showed some buoyancy with a 6% gain.