Tough Q1 for Indian Outsourcing Firms

Ann All

Several of India's largest outsourcing providers weathered a tough first quarter, having been hit by an unfortunate blend of market forces, notably the dollar's weakness against the rupee and continued wage inflation.

 

While the country's IT services and software sector is on target to bring in revenues of $50 billion in 2007-08, according to Asia Times Online, net profits are being squeezed by the strong rupee -- not a surprise, since the U.S. accounts for 60 percent of the Indian software sector's revenues.

 

Infosys Technologies, for example, suffered a 3.5 percent dent in its operating margins due to a stronger rupee -- which has appreciated 9 percent against the U.S. dollar since the beginning of 2007. Margins were also negatively affected by a 13 percent to 15 percent rise in offshore wages and a 5 percent to 6 percent increase in on-site salaries. All told, Infosys' net profit was down 8.5 percent from the previous quarter.

 

Financial analysts expect a similarly lackluster performance from Wipro, reports Forbes.

 

One Indian firm that has seemingly bucked the trend is Tata Consultancy Services, which managed to overcome the appreciating rupee by winning 54 new clients in the quarter, including six with contracts valued at more than $100 million, according to CIO Today.


 

Tata's CEO says the company charges 3 percent to 5 percent more for its services in new deals. He also credits new business in Europe and Asia with helping his company's strong performance.

 

It's a safe bet that all of India's outsourcing firms will likely step up their activities in Europe, where demand for outsourcing is far outpacing current demand in the U.S.



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Jul 23, 2007 7:52 AM David David  says:
Good luck hiring enough qualified IT staff to backfill if you decide to stop outsourcing to India! Companies are complaining enough about shortage of skilled staff as it is. Outsourcing is less about dollar savings than the ability to get the volume and flexibility of supply you need. Agree that small 'crack' teams onshore can be better than the same number offshore - but don't thinkg you'll go too well trying to fill 500 'boring' COBOL maintainance jobs out of eager young US gradsuates. Reply
Jul 23, 2007 9:35 AM Rudolph Ognibene Rudolph Ognibene  says:
Sir,I have had mixed results utilising teams from India working in Australia under my control and teams based in India working under thier own managment and only having teleconference/network links etc.The Indian teams imported and working locally for specific projects can be embedded easily into the local IT departments and develop quality work to your company's specifications and under your direct control. Working with remote teams is fraught with misunderstandings, language - English IS a second language to many of Indians, the need to be extremely precise in the specifications othersise the Change Control regime kicks in and you pay and pay, clear agreement of tasks , costs, schedules, standards of work etc.They are mostly CMMI certified but this does not gurantee the quality of the programmers code. CMMI or not the quality of coding is dependent on the individual ability of the programmer.As a former Applications Development Manager for IBMGSA I found CMMI did sometimes fail me.I had Indian Team Leaders review the Program Specifications of other Indian BA's etc to approve them but as they all spoke poor English they also wrote Poor English, They did at the reviews still approve the specifications as they spoke and wrote the same. I found that although after a lot of effort on my side and that of local Australian team members we eventually got there but the journey was long, expensive and arduous and the savings were not substantial.Apart from that the Indians eventually become the subject matter experts over time as you downsize your team and your best staff move on. The company and country lose the IP to people from another country.Because of there huge worldwide footprint you also do not know whether the software they are writing for you will be modified, rebadged and sold to other clients around the world who may be in direct competition with you. You Lose the IP and you lose ControlIT DirectorGrosvenor Computer Consulatants Reply
Jul 23, 2007 12:04 PM Sastry Dhara Sastry Dhara  says:
The total cost of ownership (TCO) for US-based companies using India off-shore companies will continue to rise. This is predicated by several factors, including the falling dollar, rising wages and lack of adequate talent in India.The US Government should look more closely at spending more money on-shore to train the domestic resources. This can be further enhanced by State and Local Government subsidies and land grants.All the work currently being off-shored to countries like India can be done on-shore, at a slightly higher cost. Though more expensive, such an on-shore solution will be more sustainable in the long run. The IT Industry will not be subject to the vagaries of global currency and political turbulence, if we built our own talent on-shore. Reply
Jul 23, 2007 12:53 PM RCRANE RCRANE  says:
I have been working with large outsourced entities like Electronic Arts for years. They use an offshore house called iEnergizer. In fact so does NCSoft, FlagShip Sony Online Entertainment and a few others. The lure of low cost wages is very tempting but after being involved at the strategic level I can honeslty say that the return on investment really never materalizes. After you take into account the logistical nightmares, the cultural issues and the frustration that players endure its just not a viable solution. I would much rather have a crack domestic team and pay a little more for it than have our paying customers endure the quagmire that I have witnessed over the years. It has been a while coming but the wage pressure will continue to increase over time and ANY advantage will disappear. Its going to become tougher and tougher for the outsourcing industry in India. Especially for the larger entities who have big infrastructures to support. Reply
Jul 24, 2007 6:38 AM Ranju Anthony Ranju Anthony  says:
With due respect, Rudolph! I wouldn't agree with your linguistic assessment of Indians. Definitely not, when you talk of top of the line software firms like TCS, Infosys, Wipro, Polaris, HCL, NIIT etc. Was I told? that they operated from Australia under your 'command'. Well my dear friend, even third tier software companies (operating out of India) make sure that their engineers are adept in handling a minimum troubleshooting mechanism (with due emphasis on local language) before they venture out. May be you were plain unlucky in getting a hastily constructed team. While I do agree about the receding cost advantage (due to an appreciating Indian curreny / higher wages); quality is one area where Indian software engineers cannot be (and are normally not) questioned at. Reply
Jul 24, 2007 12:08 PM bala bala  says:
The Indian Government would do well to focus on creating the next generation of IT professionals by streamlining/upgrading sylabbi in Colleges and improving English communicatin skills. This would give overseas clients the comfort of language and tech skills which are the main criteria for outsourcing. Large scale training facilities to teach other foreign languages - Japanese, Portugese, Spanish, French and German - would enable India to cater to the larger global market for outsourcing. Reply
Jul 25, 2007 7:29 AM Karthiik.S Karthiik.S  says:
Dear Rudolph,I had worked in 3 software companies in India in Billing co- ordination areas. What I had reportedly getting the message from the managers and Management people is. During the intial phase of the project Client is not clear with their requirements and specifications. Sometimes even clients are not sharing the data which would have significant impact on the projects. It is nothing to do with the country logo(India). Before offshoring the projects to any country People should have clear thinking what they should require? Atleast while building the prototype the clients should freeze their requirements. So the more the clarity you have in requirement the better you get your job done. Reply
Jul 31, 2007 2:44 AM Margaret Margaret  says:
I do agree on what someone mentioned: build our own talent on-shore. I work in India as an expat since more than a year ago and I have witnessed that not all what has been said about indian outsourcing is always good. In fact, there is a lot of cultural issues and misunderstanding and as a result: delays and poor quality with always one excuse. In software industry is well known that the client will never have a clear idea of what they want. Moreover, from the phsycological analysis of human behaivour, is impossible for human beings to make up our mind in one shoot. Is the task of the business analyst to guide the client on a clear thinking. Is the task of the provider to freeze and regulate the scope of the project. A good listener. There are millions of literature on this. Gandhi said: "No one ever won an argument with a client". Another importan factor here is always a "blaming game". No further explanation required on this."The cheap is expensive at the end". I believe that is not worth to save some (or much) money if at the end of the day you are sacrifiying quality and clear straight communications. Stopping the contribution to the growth of your own country is not worth.Outsourcing to companies like TCS might be dangerous. A company with a workforce near the 100,000 cannot be a controlled/organized one. At least not when you analize the chaotic cultural background of its origins. Nevertheless a big name such as TATA gives trust to its costumers. And on my experience, they are able to deliver, after a tough repeated round of big mistakes and learning lessons. India outsourcing works when the leadership is coming from the client. Also my experience. Work can be regulated and monitored from first hand. And once you win trust on the team, which is also something hard to have, you can achieve enourmous benefits. But, in general, everything goes to the old fashion methodology or try and error. Reply
Mar 9, 2008 12:06 PM Sastry Dhara Sastry Dhara  says:
All things considered, the US IT Managers should take a second look at the viability of off-shoring to India and China. Reply
Apr 3, 2008 11:29 AM James Walker James Walker  says:
I find it a total lie that U.S. companies claim they can't find IT personnel at home and are required/force to go off-shore. This is total bunk, I have to travel 180-240 miles away from home every week, stay in a motel for the week, and then go back home for the weekend because the 5 large corp's in my home town don't want to start at ground floor experience.I have a 4-year degree, 2 each 2-year degrees and 15+ years experience in all application phases, BUT.....Because I don't have a particular 'dot' of experience on 'X' or a 'dot' experience on 'Y', "I'm sorry, we are looking elsewhere, good luck on job search"U.S. workers are available but not even looked at, claiming "We've searched far and wide, thrown out the fishing nets, but c an not find local skills. Please may we send money oversea's they will help our profits to shareholders (and my golden parachute!!!!).Recently in 2 instances the contract ended, not renewed, when out-source firms said they could do jobs cheaper. They posted on board and their wages were half what the U.S. natives were making. How come they are required to hire native U.S. workers by ratio, like U.S. companies look better when they hire minorities?That's what I've dealt with for 4 years, becoming a weekend husband........................... Reply
Apr 14, 2008 12:29 PM Sastry Dhara Sastry Dhara  says:
The posting by James Walker, in response to this BLOG, is both poignant and revealing of the short-sighted policies of some US Corporations.Unfortunately, some US Corporations simply look at the "price" of hiring a resource, as opposed to the "cost" of not hiring the right resource.I predict that in the end, we will end up spending a lot more to clean up the mess generated by excessive and indiscriminate off-shoring of jobs from US. Reply
May 15, 2010 8:16 AM suvie suvie  says:

There needs to be a shift in companies strategies away from monopolies

trying to corner the market. Let's try some capitalismcompetition yielding

the lowest price and highest quality. You always hear 'we don't want a price war,'

but so many industries are really just a few big players who control the market

and just set the price as high as they can. Of course companies don't want competion,

but our system is supposed to be based on it. I'm sorry,

but we live in a capitalist system people.

As a graphic design firm, we have to deal with over-seas designers,

bid-based design websites, templates, low-ballers, and all kinds of economic competition.

We respond by offering our years of expertise,

working more efficiently, and keeping our prices reasonable.

Reply

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