Indian services providers adjust to new market conditions

In recent weeks, outsourcing giants Infosys and Wipro have both posted disappointing quarterly results.

The UK government's announcement that it will slash the amount spent by central government on large IT projects has made many suppliers anxious, while the economic climate is also causing companies to tighten their belts. So are we finally seeing a slow-down in the Indian outsourcing boom?

Emphatically not, says Anthony Miller, co-founder and managing partner of analyst TechMarketView: "If you look at the top six or seven India-based players that operate in the UK market, last year they grew their UK revenues by 16 or 17 per cent.

Offshore outsourcing is still growing, and the India-based players are growing the fastest in the UK."

Arup Roy, principal research analyst at Gartner, says that, far from having an adverse effect, the recession has been "a blessing in disguise" for Indian outsourcers.

"As companies come out of the recession, the urge to lower their operational costs in terms of IT is even greater than it used to be," he says.

Companies and public-sector organisations looking to lower their costs turn first to the Indian offshorers, he points out.

In fact, says Miller, businesses are looking to outsource more and more of their operations to offshore suppliers: "Five years ago, what was being off-shored was mainly application work.

"Today, it's infrastructure management, business processes – the whole gamut of IT services."

So what is behind the lower-than-expected quarterly results? The big Indian companies – TCS, Wipro, Infosys, Cognizant and HCL – all face particular challenges, says Roy.

Salaries to Indian IT services staff have had to increase by 12 per cent or more this year to cope with attrition rates of 20 per cent.

India's economic success has resulted in a large increase in infrastructure costs, so it is more expensive to build new facilities than it was a few years ago, while the appreciation of the rupee against the dollar has also hit Indian exporters.

A bigger challenge for Indian companies, however, is the competition from global suppliers such as Accenture, IBM and Capgemini, says Lee Ayling, a partner at KPMG, who leads the company's technology sourcing team: "These organisations all have big brands and presence in India and can therefore match their price points."

They have the added advantage, he says, of having a substantial presence in their clients' countries, such as the UK and the US.