Outsourcing stirs again

Revenue will grow, but margins will suffer

The five-year BP outsourcing deal for $1.5 billion (Rs 7,500 crore) is the best piece of news that the outsourcing industry has had since the global recession began. It tells the country that outsourcing, and its companion off-shoring, are here to stay. The hostility towards the ‘export’ of jobs, a result of high unemployment in the developed economies, is still there but so is the reality on the flip side — business’s need to outsource so that it can cut costs and raise efficiency levels. The associated good news for the Indian software and services industry is that its leading players — particularly the trio of TCS, Infosys and Wipro — are now truly ensconced in the big league when it comes to global outsourcing. No large multi-vendor deal can be finalised without them getting a piece of the action. Interestingly, while the beginning of the end of drought (a virtual absence of large new orders) is visible, it is Europe which is quicker off the mark, not the US which still is the biggest market.

For the smaller players, the next couple of years will be tough. Through the year-long process that BP undertook to finalise its order, it brought down the number of its vendors from 40 to five. During the boom years, when there were more orders than the large offshore vendors could service, the big clients also chose smaller players. Now, with less to go around and the big players having developed end-to-end capabilities, it is the smaller vendors which have lost out. To keep getting orders from large global clients, they have to make their niche offerings indispensable. The consolidation among offshore vendors in the commoditised space has been on for long, and shows no sign of abating. The Indian leaders are still getting orders because they have differentiated themselves by developing distinctive processes which have delivered better cost and quality.

Within this scenario, the warning note for the Indian leaders is that the global incumbents, IBM and Accenture, have got the juicier parts of the deal and the Indian players have secured the low-end work of application development and maintenance. So they are still some distance away from their long-term aim of going up the value chain by delivering to large clients services like systems integration, enterprise solutions and infrastructure management. In comparison, the global incumbents have been able to beat the cost challenge by stabilising their Indian operations. Simultaneously, the Indian leaders’ attempts to acquire consulting skills remain work in progress. The second challenge facing the large Indian players is to deliver substantial savings in costs and gains in efficiencies, running into several percentage points each. So while the new order will take care of volume and revenue, the same cannot be said about margins. The need to not just lower price but also deliver more for less means they will have to keep focusing on newer processes to raise productivity. But they will find it difficult to regain the valuation premium they enjoyed before recession set in among the developed economies.