Indian outsourcers not yet hit by weak dollar

Infosys Technologies Ltd., India’s second largest outsourcer said Thursday that its margins have actually improved in spite of the appreciation of the Indian Rupee against the US dollar. Yesterday another outsourcer, iGate, said its performance was not affected by the weakening dollar.

A weakening dollar impacts Indian outsourcing companies because over 50 percent of their business comes from the US, and is billed in dollars. The work is delivered offshore from India, where the payments to staff and other services are in Indian Rupees. Because of the weakening dollar, Indian companies now have fewer Rupees for every dollar earned abroad.

Indian outsourcers have however taken drastic cost-cutting measures and hedged on currency. In a business model that is cost-plus, where the key cost and input is software developers, the company cannot reduce its hires. But it can increase their productivity, and also shorten the bench – the number of staff kept idle to be able to meet any peaking in customer demand.

Infosys and iGate have also been aided by the willingness of customers to raise prices.

Infosys said its revenue for the July-September quarter was US$1 billion, up by 37 percent from the corresponding quarter last year. The company’s net income grew by 36 percent to $271 million during the quarter. iGate said net income went up 127 percent in the quarter, but revenue actually dipped. The company said there had been a delay in customers placing orders.

Tata Consultancy Services Ltd. (TCS) and Wipro Ltd, India’s largest and third largest outsourcing companies, are scheduled to announce their results next week. They may also report that they have countered the impact of the weak dollar by good currency hedging, and cutting costs.

For Indian outsourcers, the current problem is a sharp reminder of a problem that they knew all along. You can’t depend on one country for a majority of your business, even if it is the US. Indian outsourcers are now attempting to mitigate that risks by focusing on other markets like Europe and S.E. Asia. It comes at a good time when Europe is opening up to offshore outsourcing.

They are also looking closely at the Indian market, which they de-focused earlier because it didn’t pay well enough, and in dollars. Folks like IBM and Hewlett-Packard have in the meantime made deep inroads into the market.

These are trying days for Indian outsourcers, but these companies excel in their ability to respond quickly to the business environment, because of the strong processes they have in place. The Rupee is meanwhile expected to continue to appreciate as foreign capital inflows into India increase, and the country’s economy is booming.

Indian outsourcers not floundering, not migrating

NASSCOM says no slowdown in outsourcing to India

India’s National Association of Software and Service Companies (NASSCOM) in Delhi said that India is on track to achieve US$60 billion in exports by 2010, despite the appreciation of the Indian Rupee, according to a report by AFP.

NASSCOM’s President Kiran Karnik said Wednesday that it does not see an export slowdown, but added the appreciation of the rupee could weigh on margins and profits, according to the report.

The rupee has risen by more than 11 percent this year against the dollar, leading to speculation that Indian outsourcers, who get over 60 percent of their revenue from the US, may be badly hit. There was also speculation that Indian outsourcers were setting up operations outside India to counter the appreciation of the Rupee, and higher wages in India.

However, as pointed out in this blog in September, India’s outsourcing industry is in fine fettle, but for possibly a few percentage point drops in their whopping profitability and Rupee earnings. The post said:

“But even as (Indian outsourcers) 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.”

The slow-down in the sub-prime mortgages market in the US may have also impacted some Indian outsourcers, but only marginally, and the staff were quickly shifted to other clients.

Confident of the outlook for the industry, Indian outsourcers now say that the appreciation of the Rupee and the slow-down in the sub-prime mortgages market are part of normal risks they have to deal with in the business.

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Indian outsourcers not floundering, not migrating

Outsourcing outsourcing, or plain spin ?

India is outsourcing outsourcing, according to a report in the New York Times.

Ahead of the US elections, when outsourcing, and the loss of tech jobs in the US, will again likely figure as a big issue, Indian outsourcers have floated the new spin that they are in fact creating a large number of jobs in the US and Europe, nay outsourcing to the US.

Some link the creation of jobs in the US and Europe and other countries to the appreciation of the Rupee versus the US dollar, and staff shortages in India.

However, most of Infosys’ 75,000 employees are Indians, in India, says the New York Times report. India’s large outsourcers have about 60,000 staff each on an average in India, and having a couple of thousand staff in the US or Europe will not make the Rupee appreciation more manageable, or reduce staff turnover in India dramatically.

It is a case of making a large virtue out of a small necessity. Indian companies have been setting up operations in the US, Europe, and Mexico for some time, because their customers are demanding on-shore and near-shore capabilities in Europe and the US. They are also choosing low-cost locations in the US and Europe. When a company like Wipro Ltd. wants to set up operations on-shore in the US it will not go to pricey New York to set up shop, but to locations like Atlanta.

In Europe, which is slowly getting around to the idea of outsourcing, and its variant offshore outsourcing, customers are keen that their employees are protected. That means that Indian companies should be willing to take in staff from a customer – witness the deal between Infosys Technologies Ltd. and Royal Philips Electronics N.V.

So it is not that Indian companies are exporting jobs, or “outsourcing outsourcing”. They are just doing what they have been doing for years --- setting up operations closer to the customer, when required. Most of it used to be called on-site work earlier. As the H1-B visa regime got tighter in the US, or in Europe because of the need for language skills and to absorb staff from their customers, they have to hire locals. Infosys has employed local staff in Brno for over two years for their language skills.

It is hence a trifle arrogant for Indian outsourcers to claim that they are outsourcing jobs to the US and Europe. This is spin for the pols in Washington.

As of now about 85 to 90 percent of their staff are still in India, and it won’t change any time soon. Even after the appreciation of the Rupee and the rising wages in India, these companies continue to hire frenetically in India, because the comparative costs are still lower. Satyam, for example, is hiring 15,000 new staff before the end of the Indian fiscal year to March 31, 2008, according to this report in The Economic Times.

In contrast, Wipro Ltd. plans to hire 500 in Atlanta over the next three years, besides some 900 staff from its proposed acquisition of Infocrossing. Inc.

Spin about outsourcing to the US will not go down well with folks like Washtech who have been complaining that tech jobs in their thousands are moving from the US to India, and sure they have. By coming up with the lame one that they are also hiring a few hundreds in the US, Indian outsourcers can hardly hope to assuage the anxiety of anti-outsourcing lobbies.

Better to take the challenge headlong. Talk about the competitiveness offshore outsourcing is giving to the US. Inform the American people that a large proportion of employees in India are employed by Indian engineering centers of US companies. Tap into unstinted support from folks in the ITAA (Information Technology Association of America). But please, don’t insult people’s intelligence with the “reverse outsourcing” or “outsourcing to the US” spiel.

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Indian outsourcers not floundering, not migrating

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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