Tuesday, September 25, 2007

Indian outsourcers not floundering, not migrating

Let me start by saying that Indian outsourcers are not floundering because of the appreciation of the Indian Rupee against the dollar. Yes, their rupee realizations will go down because of the appreciation of the rupee against the dollar. After all close to 60 percent of their business comes from the US.

But even as their realizations are going down, their costs of keeping staff on-site at client sites in the US is also coming down. Other dollar denominated costs are also coming down. This is not to say that these companies won’t be affected at all, but expect a few percentage points drop in margins.

As usual the top players like Infosys Technologies Ltd., Tata Consultancy Services Ltd. (TCS), and Wipro Ltd. will report next month robust quarterly revenue and profits growth, that are the envy of their peers in the US and Europe.

Another myth that is doing the rounds is that companies like Infosys, TCS, and Wipro are setting up operations outside India to get around the appreciation of the Rupee. Earlier, it was said that these companies were doing it because of staff shortages in India.

Staff shortage is a real problem, but not as yet so acute as to expect Indian companies to migrate operations abroad. If folks like Infosys and Wipro are setting up operations in Mexico and Europe, it is because they need to offer near-shore facilities to customers to increase their comfort level. Being on similar time-zones with customers also helps. That is also the reason Wipro is setting up an operation in Atlanta.

To bag contracts in Europe, it also helps if these companies are willing to absorb local staff. That strategy has paid off for TCS for example with the contract it bagged from the Pearl Group Ltd.. It also paid off for Infosys when it bagged a business process outsourcing contract from Royal Philips Electronics N.V. this year in return for taking over Philips’ centers in Poland, Thailand, and India. Many years ago HCL Technologies Ltd. got call center business from British Telecom in return for acquiring the Apollo call center in Belfast.

But this does not represent a migration from India by Indian outsourcers. Companies like Wipro, TCS, Infosys have an average of about 60,000 staff each on their roles, and the overseas ventures will likely account for between 10-15 percent of staff.

That percentage of staff abroad is not a good enough hedge against a rising Rupee, and certainly hasn’t eased staff shortages in India. It has however given these companies the right mix of a global presence and distribution of locations for disaster recovery, without sacrificing on the still large cost benefits of delivering from India.

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