Analysts See Trouble Ahead for India's Outsourcing Sector

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Financial results for Indian outsourcing firms in the latest quarter are decidedly mixed, with the companies reporting financial gains but lowering future guidance in the face of continued problems with the rupee's strength against the dollar, a softening U.S. market and difficulties finding enough employees.


The strong rupee, which has risen to nine-and-a-half-year highs, is the primary concern for companies like Infosys Technologies and Tata Consultancy Services (TCS), according to a Reuters India report. While the firms are still posting respectable gains due to strong demand for their services, financial analysts fret that they won't be able to sustain such growth.


Shares in Infosys and TCS declined during the quarter, while the broader Indian financial market posted a gain of 18 percent. CLSA Asia-Pacific Markets predicts a "... period of uncertainty and volatility -- that may extend into 2008" for the outsourcing sector.


Many analysts appear to think that TCS is meeting these challenges better than its rivals. TCS earns a nod from Merrill Lynch due to its plans to add 22,000 new staffers, vs. Infosys' expected addition of 18,000 recruits, according to a story on indiaearnings.com.


The Associated Press reports that TCS boosted staff salaries by 12 percent to 15 percent in the quarter to curb attrition. Other strategies included charging clients higher rates and moving more work to low-cost sites. While U.S. clients had accounted for 60 percent of the company's revenues in recent years, that number has fallen to 52 percent.


TCS is also working hard to diversify its services beyond its bread-and-butter application development and management business, reports InformationWeek, with consulting, business process outsourcing (BPO) and infrastructure services accounting for more than half of its revenues in the latest quarter.


The firm's chief operating officer gave a shout-out to its infrastructure management business, which has seen strong growth in the three years TCS has offered such services. "Those deals used to be a half-million dollars; now we're seeing deals of $200 (million) to 300 million," he said.