Problems in Europe not to affect IT firms

However, currencies, elections remain concerns.

Despite a debt crisis in Greece, Spain, and Portugal, other countries in Europe, such as Germany and France, besides the Nordic region (Sweden, Norway, Finland, Denmark) and Benelux (the Netherlands, Belgium, Luxembourg), are expected to continue and, in some cases, even increase their outsourcing and offshoring work to low-cost countries like India.

“Though Europe is still fragile, we are certainly seeing an uptick in outsourcing, as well as offshoring from European clients. Deals are getting shorter and smaller in duration, but it certainly is increasing. To give you an idea of the 800 inquiries that we received last year from European clients, about 90 per cent asked us about offshoring,” explains Gilbert Van Der Heiden, Gartner’s research director for information technology (IT) sourcing.

 

The UK, according to Gartner’s forecast on enterprise IT spending for 2010, was expected to witness a growth rate of 3.8 per cent for 2010, while Germany was expected to grow by 3.2 per cent. For France, it was 4.3 per cent and the Nordic regions, 4.2 per cent. While Benelux is expected to clock a 4.6 per cent growth rate.

Sridhar Vedala of Quantum Step, a global sourcing company, concurs. He says earlier European customers started with staff augmentation but as they see the cost advantage, they are looking beyond that and want to partner at a strategic level. “Other than the economic downturn and need to cut cost, European customers use a large number of contractors. Due to the immediate cost savings initiatives, they are looking at replacing expensive contractors with offshoring,” he says.

IT firms also agree that Europe is much more positive to offshoring than it was before the global meltdown hit. “European clients are much more open for discussions now. We have seen some good traction in the government and the healthcare segment,” says a senior executive of a large IT firm. But, he adds, some immediate concerns are the upcoming UK elections and the fluctuation in the currency.

“The Europe crisis will not have much of an impact on Indian IT service providers. The impact will be on valuations due to the currency movement, but this will not impact the deal flow. Similarly in the UK, the incumbent government is under huge pressure to reduce cost,” says Peter Bendor Samuel, Chief Executive Officer, Everest Group.

Currency volatility is indeed a concern. From January 1 till date, the euro has depreciated by almost nine per cent to the rupee. Similarly, the dollar has appreciated by seven per cent to the euro over the same period. As for the pound, it has depreciated against the rupee by almost 9.6 per cent since the beginning of 2010.

And, more than 25-30 per cent of revenues of the Indian IT firms come from Europe, especially the UK. For the top three IT firms, the revenue contribution from Europe is over 25 per cent. A one per cent appreciation (or depreciation) in the currency means a 40-basis points positive or negative benefit on the operating margins of companies. This particular volatility is expected to have a 0.9 to 1.3 per cent cross-currency impact for the quarter, predict analysts.

Another concern is over the upcoming UK elections. A case in point is the recent £600 million, 10-year, outsourcing contract awarded to Tata Consultancy Services from the UK’s Personal Accounts Delivery Authority to administer the National Employee Savings Trust scheme. The Conservative Party has said it’d review the contract if it comes to power.

“Elections in UK are a whole different issue. Depending on who comes to power, there could be some impact on outsourcing. Issues in the UK will be around employment. Offshoring will be an election topic,” agrees Vinu Kartha, Vice President, Tholons, a strategic advisory firm for global outsourcing.

“Europe has some serious challenges. The population is ageing, and they are running out of skills. They will have to look at outsourcing and offshoring. Most of the large players have benefited from this. It iss for the others, the medium-sized players, to adopt this,” remarks Vikram Gulati, Director of Quantum Step.