news analysis When the United States sneezes, the world catches a cold--so the adage goes. That could prove particularly true for India's IT and IT-enabled services (IT-ITES) industry, where the United States accounts for the largest share--at over 50 percent--of the Indian software and outsourcing market.
"The U.S. slowdown will impact the smaller IT-ITES firms more," Hari Rajagopalachari, executive director at PricewaterhouseCoopers India, told ZDNet Asia in an e-mail interview. In fact, he added, it may lead to increased consolidation in the small and midsize industry segment.
According to Milan Sheth, Ernst & Young India's partner of business advisory services and leader of technology and telecom verticals, the economic slowdown will most affect midsize IT-ITES companies.
"Most small firms have very strong niches. It's the midsize firms that will be badly hit in the event of a portfolio rationalization by the American clients," Sheth told ZDNetAsia in a phone interview.
The economic slowdown in the United States has already had some impact on the Indian market. The rupee has been strengthening against the dollar for over a year now, causing worries for Indian exporters.
The Indian stock markets also crashed due to the downturn, with the BSE Sensex dipping by nearly 13 per cent in just two trading sessions in January this year. It bounced back after the U.S. Federal Reserve cut interest rates. The BSE Sensex, or Bombay Stock Exchange Sensitive Index, comprises 30 of BSE's largest and most actively traded stocks.
"The U.S. slowdown is a long and protracted one," Rajagopalachari said. He explained that the U.S. slowdown is due to structural readjustments in the country, while the global economic scenario is caused by changing fundamentals in the currency, energy and financial markets.
"The implications for all of India's externally linked sectors are significant," he said. "The strongest and most immediate impact will be on the IT-ITES sector."
The weak will fall Sheth noted that while the budgets of the U.S.-based companies will undoubtedly be cut, the services of Indian companies that are adding value will be retained.
"Those companies that haven't performed may lose out," he said. "For instance, if an American telecom company today has 18 vendors, out of which 12 are in India, it may want to reduce that number to 14 or 16. So, the less efficient ones may be weeded out first."
And while the economic slowdown implies added pressure to cut costs through further offshoring, which brings good news for Indian service providers, this sweetener would take some time to materialize.
Rajagopalachari said: "In the long term, low-cost offshoring trend will increase. But in the short term, between 12 and 18 months, there will be a demand contraction due to management changes and a paralysis in decision-making in the U.S. corporate sector."
During a recent media briefing, Kemal Dervis, administrator at the United Nations Development Program (UNDP), said the U.S. slowdown might make it difficult for India to sustain its economic growth rate of 8 percent.
June, I got a freak call from a young IT professional working in a large Indian IT firm. He was an engineer from IIT and an MBA...By Swati Prasad
Rajagopalachari concurred: "The U.S. economic crisis is structural and hence long-term. It is not a cyclical phenomenon alone. India will be impacted significantly," he said. "About 50 percent of India's economic growth is structural and the rest is affected by cyclical factors."
"Over the next three to five years, it is difficult to see Indian growth rates outside the 5- to 8 percent range. The U.S. contraction in consumption will hit exports across sectors, not just in the IT-ITES sectors," he said.
India's way out of the downturn cycle, Rajagopalachari said, is to step up domestic consumption in the face of rising inflation.
According to Sheth, the challenge Indian companies face is to demonstrate their ability to value-add.
Over the last 12 months, Indian companies have been diversifying their risks by increasing their focus on the non-US markets, such as Europe.
However, Rajagopalachari said, given the preponderance of U.S. revenues in the portfolios of India's IT-ITES sector, the positive impact on revenues and margins as a result of revenue diversification away from the US markets, is "marginal".
Indian IT-ITES companies have also undertaken labor-cost rationalization by getting rid of non-performing workforce and by tightening recruitment policies. There has been a sharper focus on increasing offshore leverage in projects to improve profitability.
Companies have also reduced the average age of the workforce in order to reduce cost and improve overall profitability. Sheth said: "Companies may not be adding the kind of people that they were last year, but they are definitely getting better yield from existing employees."
There is, however, silver lining amid the gloom. For instance, the pressure on American companies to increase offshoring activities in order to combat cost pressure, will increase in due course.
Reports also highlight that despite the U.S. slowdown, the number of acquisitions by Indian IT-ITES companies in the United States during the first two months of 2008, increased by nearly 75 percent.
Sheth added: "One must not forget that India's domestic demand is booming."
In addition, the slowdown has accelerated the desire of India-born professionals based in the United States to return to their home soil. While such IT professionals previously returned in hopes of being part of the India growth story, today, the sub-prime crisis, slowing economy and fear of layoffs in the United States are prompting these workers to look for opportunities in India.
As a result, India's talent pool is getting richer and it could only be a matter of time before the Indian IT-ITES industry overcomes the U.S. slowdown hiccup
Wednesday, May 28, 2008
Recession-proof your IT, CIOs warned
Businesses need to take action to cut tech costs before a recession takes hold in the United States and other major economies.
IT bosses are being urged by analyst Gartner to take pre-emptive cost-cutting measures well before any actual recession begins to bite.
With concerns increasing about the short tem future health of some of the world's leading economies, Gartner predicts people in charge of IT budgets will receive mandates from the board to cut costs across the business.
The warning also advises organizations in countries outside the United States with economic growth forecast to be less than two percent in 2008 to act now.
In November last year, Gartner said CIOs should prepare two IT budgets for 2008 due to the economic uncertainty. The first budget would assume a continuation of the status quo, while a second would act as a back-up in case of a business slowdown.
Ken McGee, VP and Gartner fellow, said economic factors on which this original research was based have worsened to the extent that tech departments should start cutting costs now.
Gartner has come up with a six-point plan to help companies cut budgets successfully, including devoting the best workers to cost cutting projects and basing bonuses on how successful they are in achieving this.
Tim Ferguson of Silicon.com reported from London.
IT bosses are being urged by analyst Gartner to take pre-emptive cost-cutting measures well before any actual recession begins to bite.
With concerns increasing about the short tem future health of some of the world's leading economies, Gartner predicts people in charge of IT budgets will receive mandates from the board to cut costs across the business.
The warning also advises organizations in countries outside the United States with economic growth forecast to be less than two percent in 2008 to act now.
In November last year, Gartner said CIOs should prepare two IT budgets for 2008 due to the economic uncertainty. The first budget would assume a continuation of the status quo, while a second would act as a back-up in case of a business slowdown.
Ken McGee, VP and Gartner fellow, said economic factors on which this original research was based have worsened to the extent that tech departments should start cutting costs now.
Gartner has come up with a six-point plan to help companies cut budgets successfully, including devoting the best workers to cost cutting projects and basing bonuses on how successful they are in achieving this.
Tim Ferguson of Silicon.com reported from London.
India's rising Rupee bedevils outsourcers
The Indian rupee seems to be on steroids this year.
On Apr. 24, the currency surged to 41.14 to the U.S. dollar, its highest rate in nine years. In just the past six months, the rupee has appreciated 8.4 percent against the dollar, and economists predict the Indian currency will be even stronger in coming months.
That's cause for concern in the country's crucial US$8 billion outsourcing sector. The United States is the biggest market for most Indian infotech companies, accounting for over half of the revenues this industry generates by handling back-office and other operations. So the rising rupee is putting a squeeze on earnings--cutting margins by about 2.5 percentage points since mid-2006.
Raman Roy, the pioneer of India's outsourcing industry, and head of outsourcing firm Quatrro BPO Solutions, said: "The only thing is to work around the strength of the rupee, as cost reduction is only an outcome of good management."
"Obviously it is hurting all of us," added Sethuraman Mahalingam, chief financial officer of Tata Consultancy Services (TCS). For the fiscal year ended in March, 2007, TCS' operating margin was 25 percent, compared to 25.5 percent for the year before. That's scaring investors. Since Apr. 13, when outsourcing giant Infosys announced its results, the IT Index on the Bombay Stock Exchange has fallen by 0.17 percent even as the overall market index rose 4 percent. Infosys' stock received a 2 percent haircut on Apr. 24 and finished trading at US$50. Constraints to growth The muscular rupee is adding to competitive pressures already being felt by the outsourcing industry. Wage costs have been on the rise by 15 percent thanks to stiff competition for talent among tech companies such as IBM, Accenture, and EDS. For instance, IBM has more than doubled its India staff to 53,000, has spent US$2 billion there since 2004, and plans to spend another US$6 billion by 2009.
And by this August, Accenture is expected to have 35,000 of its 160,000 employees in India.
"The skills problem is now the single most important constraint to growth [in India] and an appreciating rupee simply adds to that," says Sanjeev Sanyal, senior economist at Deutsche Bank in Hong Kong.
What's pushing the rupee upward? Foreign investment has been pouring into India. Since January alone, institutional investors have pumped US$2.5 billion into Indian capital markets. At the same time, the Reserve Bank of India has been trying to dampen India's 6.07 percent inflation, and has raised interest rates five times in past 12 months.
The central bank also hiked the cash reserve ratio--the amount that banks have to deposit with it--three times since December. Over the same period, India's foreign exchange reserves have surged by 25 percent to more than US$200 billion.
Finding new ways to hedge To keep the strengthening rupee from taking too much of a bite, Indian IT companies have been hedging against their currency risk. For the first three months of this year, Wipro hedged US$600 million while TCS hedged nearly US$1 billion and Infosys US$470 million. At the same time companies have also tried to expand their customer base beyond the United States.
Last fiscal year, 52 percent of TCS' US$4 billion in revenues came from the United States. That's down from 59.5 percent two years ago as it has expanded into Europe, China, and Australia. Meanwhile Wipro today gets 32 percent of its sales from the euro zone vs. 62 percent from the United States. While the rupee has also strengthened against the euro, yen, and Singapore dollar, the gain is less than against the U.S. dollar.
How long will the strong rupee add to outsourcers' problems? Probably for at least three to six months, economists say, if the Reserve Bank of India keeps hiking rates to curb inflation. That will put more pressure on India's powerful infotech companies to find new ways to hedge their risk and contain rising costs.
On Apr. 24, the currency surged to 41.14 to the U.S. dollar, its highest rate in nine years. In just the past six months, the rupee has appreciated 8.4 percent against the dollar, and economists predict the Indian currency will be even stronger in coming months.
That's cause for concern in the country's crucial US$8 billion outsourcing sector. The United States is the biggest market for most Indian infotech companies, accounting for over half of the revenues this industry generates by handling back-office and other operations. So the rising rupee is putting a squeeze on earnings--cutting margins by about 2.5 percentage points since mid-2006.
Raman Roy, the pioneer of India's outsourcing industry, and head of outsourcing firm Quatrro BPO Solutions, said: "The only thing is to work around the strength of the rupee, as cost reduction is only an outcome of good management."
"Obviously it is hurting all of us," added Sethuraman Mahalingam, chief financial officer of Tata Consultancy Services (TCS). For the fiscal year ended in March, 2007, TCS' operating margin was 25 percent, compared to 25.5 percent for the year before. That's scaring investors. Since Apr. 13, when outsourcing giant Infosys announced its results, the IT Index on the Bombay Stock Exchange has fallen by 0.17 percent even as the overall market index rose 4 percent. Infosys' stock received a 2 percent haircut on Apr. 24 and finished trading at US$50. Constraints to growth The muscular rupee is adding to competitive pressures already being felt by the outsourcing industry. Wage costs have been on the rise by 15 percent thanks to stiff competition for talent among tech companies such as IBM, Accenture, and EDS. For instance, IBM has more than doubled its India staff to 53,000, has spent US$2 billion there since 2004, and plans to spend another US$6 billion by 2009.
And by this August, Accenture is expected to have 35,000 of its 160,000 employees in India.
"The skills problem is now the single most important constraint to growth [in India] and an appreciating rupee simply adds to that," says Sanjeev Sanyal, senior economist at Deutsche Bank in Hong Kong.
What's pushing the rupee upward? Foreign investment has been pouring into India. Since January alone, institutional investors have pumped US$2.5 billion into Indian capital markets. At the same time, the Reserve Bank of India has been trying to dampen India's 6.07 percent inflation, and has raised interest rates five times in past 12 months.
The central bank also hiked the cash reserve ratio--the amount that banks have to deposit with it--three times since December. Over the same period, India's foreign exchange reserves have surged by 25 percent to more than US$200 billion.
Finding new ways to hedge To keep the strengthening rupee from taking too much of a bite, Indian IT companies have been hedging against their currency risk. For the first three months of this year, Wipro hedged US$600 million while TCS hedged nearly US$1 billion and Infosys US$470 million. At the same time companies have also tried to expand their customer base beyond the United States.
Last fiscal year, 52 percent of TCS' US$4 billion in revenues came from the United States. That's down from 59.5 percent two years ago as it has expanded into Europe, China, and Australia. Meanwhile Wipro today gets 32 percent of its sales from the euro zone vs. 62 percent from the United States. While the rupee has also strengthened against the euro, yen, and Singapore dollar, the gain is less than against the U.S. dollar.
How long will the strong rupee add to outsourcers' problems? Probably for at least three to six months, economists say, if the Reserve Bank of India keeps hiking rates to curb inflation. That will put more pressure on India's powerful infotech companies to find new ways to hedge their risk and contain rising costs.
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