Indian services providers adjust to new market conditions

Salary hikes, rising infrastructure costs and the need to open onshore centres in client countries mean that Indian companies can no longer take huge margins for granted

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.

Indian services providers adjust to new market conditions

Salary hikes, rising infrastructure costs and the need to open onshore centres in client countries mean that Indian companies can no longer take huge margins for granted

Indian companies have also been slow to respond to the increasing demand for cloud computing, says Roy, and risk being left behind: "They have not been doing a good job in terms of making themselves prominent.

"They do have cloud offerings in place, but compared with IBM or other providers, it seems that effort is half-hearted."

So, how are the Indian outsourcers responding to changing circumstances? Many, says Ayling, are opening offices in client companies, and hiring local people to provide the reassurance to clients of an onshore presence. Infosys, for example, has acquired Axon, based in Epsom.

The increasing cost of doing business is causing both the Indian providers and their competitors to open outsourcing centres in Eastern Europe, but also in countries such as the Philippines and Malaysia, both of which Ayling describes as having "very high levels of education and English language skills, and fairly good infrastructures".

They are also looking at other markets. While the UK still represents about 75-85 per cent of European revenues for Indian outsourcers, other European countries, with more immature markets, are waking up to the advantages of offshoring, as is Australia. Despite attempts by the US government to restrict visas, the US market continues to grow.

There are still plenty of growth opportunities for Indian outsourcers, says Ayling.

Indian companies such as TCS now see themselves as global businesses, able to compete on equal terms with Accenture or Capgemini. Will Arnold, research director of Apollo research, has examined media coverage of outsourcing and says that this can help them when it comes to finding new clients, particularly in the public sector: "There's a nervousness about offshoring jobs, and there are also sensitivities surrounding privacy – where you hold data is an issue.

"Therefore you can see companies reposition themselves less as offshore and more as global players, or by building their profile as businesses in the UK. And some of them are doing that quite successfully."

The model of Indian outsourcing that we saw at the beginning of the outsourcing boom has changed: salary hikes, rising infrastructure costs and the need to open onshore centres in client countries all mean that Indian companies can no longer take huge margins for granted.

But Roy is confident that this represents a blip rather than a long-term downturn: "Indian companies are realigning themselves, coming up with new offerings and new sales tactics. Once they fine-tune these changes, they will continue their growth story."