Monday, October 13, 2008

China Claims Outsourcing Boost

By Gary Bowerman, on Monday, 13 October 2008

Published in : The News, News October 2008

As China seeks to diversify its economy away from its traditional manufacturing base, Chinese companies have won outsourced service contracts worth USD1.9 bn in the first eight months. This figure is up 17 per cent from the same 2007 period, according to the Ministry of Commerce.

By the end of August, China had around 1,800 outsourcing companies, with about 330,000 employees. In 2007, total contracts abroad for outsourced services accounted for USD2.09 billion.

The Chinese government plans to develop 10 outsourcing base cities by 2010, in an effort to build up outsourcing services and utilise the nation's large population of unemployed university graduates. The cities include Shanghai, Dalian, Xi'an, Hangzhou, Nanjing, Shenzhen and Chengdu.

Friday, October 10, 2008

Outsourcing industry needs to evolve to high-skill services

The Philippines will have to improve training for engineers, programmers, and other high-skill professions and expand broadband facilities to further strengthen the local busines process outsourcing (BPO) industry, amid the ongoing global economic slowdown, the Economist Intelligence Unit (EIU) said yesterday.

EIU pointed out that even as the country enjoys a "real competitive advantage" in its outsourcing sector due to an English-proficient workforce and good telecommunications infrastructure, the said sector is extremely vulnerable in the face of a slowdown and even a recession among the world's major markets.

"One of the reasons it has been successful is because the BPO sector does not need a lot of capital requirements. [It is] a footloose industry. If it all goes wrong, [investors] can quickly [leave]," EIU corporate network director and Southeast Asia expert Justin Wood said at the Economist Conferences' Business Roundtable with the Philippine government yesterday.

The sector, he said, needs to move up the value-added ladder by going more into outsourced operations for animation and engineering design.

Nokia Siemens Networks Asia Pacific region head Christian Fredrikson, for his part, said at the conference that the country needs to expand broadband access to the internet to rural areas.

But the Philippines' infrastructure for the BPO industry is in place, especially as the country has increased "redundancy" or created back-up internet lines with new landing stations in La Union and Cagayan, President Gloria M. Arroyo said at the conference.

The Education department is also integrating information and communication technology in public schools' curriculum, the President added.

Aside from the BPO industry, EIU also gave prescriptions for other sectors.

The Philippines needs to shift to the manufacturing industry and away from the lower-growth agriculture sector, Mr. Wood said.

Perceptions of corruption and the complicated business regulations need to be dealt with to prop up the investment climate, especially as Vietnam is gaining more ground in export-based production.

Mining also has a huge potential as the country is highly mineralized. The sector accounted for just 1.5% of gross domestic product last year, a figure far too low compared with other countries, Mr. Wood said.

Security issues, particularly the conflict in Mindanao, need to be resolved while more infrastructure outside of Metro Manila must be built to boost the promising tourism industry, he added.

Ms. Arroyo, however, side-stepped the security problem and said that the poor performance of the tourism industry is due to the weak carrying capacity of existing transportation networks. — Jessica Anne D. Hermosa

From: www.itworld.com

Offshore outsourcing: what role will recession play?

by Arpit Kaushik

October 10, 2008 —

The ongoing credit crisis is a concern for everyone in nearly every industry-fear of lost jobs, foreclosed homes and bankrupt businesses. But those lost jobs are likely to further bolster the booming offshore outsourcing market -- so the experts predicted. (Also read How to Save Your Job During a Recession and 10 Secrets for Searching for a Job During a Recession.)

Fast-forward two months: it's time for them to eat their words. Neither are customers outsourcing more nor is the industry growing any faster. In fact each day service providers only revise their growth estimates in the downward direction.

Some brave analysts are finally coming out with the truth. Days after Wall Street's collapse, vice-president and principal analyst with US research firm Forrester, John McCarthy, said the scale of the crisis had rendered all previous studies including Forrester's own survey, released earlier this month, redundant, and that Indian IT providers should prepare for slower growth and lower profits. "It is naive to say an economic slowdown is good because cost-cutting will lead to higher offshoring. This is no longer a recession, it is fundamental restructuring of financial services that is taking place," says McCarthy.

What the hell happened in these two months?

Multiple factors are at play here-some recent developments and some historic issues that have been building over time.

About 20 percent to 40 percent of the revenues of offshore outsourcing firms are tied to the financial services industry. With its collapse, companies have been forced to look to other vertical markets. In normal circumstances, that should have been enough to offset the revenue erosion. But the problem is, that everyone is in the same boat and those other industries are also impacted by the crisis, fading consumer demand and reduction in spend.

For example, the travel vertical has started seeing a rise in ticket cancellations and refunds, which has led service providers like WNS to greater conservatism on revised guidance. Hexaware stated that delayed decision-making is spreading out from BFSI to travel, and it has now reduced its annual growth estimate from 24 percent to 7 or 9 percent. Sasken is now cautious about telecom handset segment as all the top-five handset customers are seeing a slowdown in sales (a u-turn from Sasken's bullish stand on this segment a couple of months ago).

So, suddenly all players are chasing a smaller market, in which there was little differentiation amongst players anyway, and it will lead to pricing pressure, reduced profitability and less growth.

It will also become difficult to generate new business (unless driven by price), which will result in generic and inefficient players rightfully getting wiped out of the market. Rather than getting upset about it, I think it's an exciting opportunity for service providers to innovate and build their differentiators. Customers, I would say, have never had it so good-they can finally be in the driver's seat.

It's also difficult to accurately quantify the business value of offshore outsourcing. At a theoretical level, it does make sense. At a headcount level, it also makes sense. But at a business outcome level, the real and hidden costs are often ignored and many companies are left thinking "hey wait a minute, I offshored hundreds of my staff...why isn't my profitability increasing?" And despite share of offshoring rising, why haven't we ever seen a reduction in IT spend? That's because offshore outsourcing has so far focused on headcount as the currency, not the business value generated. That is about to, thankfully, come to an end.

The more I think about the full value chain, the more intrigued, and sometimes scared, I get about the full impact. TCS has reduced its annual hiring estimate by about 30 percent, Wipro already reduced headcount in IT services last quarter, Polaris has resorted to just-in-time hiring, Infosys is visiting fewer campuses...what does it mean for the employment market in offshore outsourcing countries? Will wage inflations ease off? Will attritions finally come to manageable levels? Will being skilled come back in fashion compared to just having an IT diploma/degree? We'll have to wait and see...
It is the end of the golden age of offshore outsourcing, but it also heralds a new dawn-the age of truth and rationality. Where offshore outsourcing delivers real, tangible business value, and service providers are focused on making things work for customers in unique and innovative ways.

Here's to the new age...cheers!

CIO.com

India October 10, 2008, 7:36AM EST text size: T T

India's Tata Wins Big Citi Outsourcing Deal

TCS acquires Citigroup Global Services—and bags a giant contract to provide outsourcing services to Citi for the next nine-and-a-half years

by Nandini Lakshman

It's festival time in India, and Tata Consultancy Services, the country's largest IT software and services provider, is celebrating with gusto. After months of speculation, TCS acquired Citigroup's (C) India-based outsourcing unit, Citigroup Global Services, for $505 million in an all-cash deal announced on Oct. 8. That's the largest-ever purchase for TCS. What's more, the company bagged a $2.5 billion contract to provide process outsourcing services, application development, and infrastructure support to Citigroup and its affiliates over nine-and-a-half years. "This transaction will complement our domain expertise and bring new capabilities to TCS that will help drive growth," says S. Ramadorai, chief executive officer of TCS.

At a time when stock prices of India's outsourcing powers are crumbling (BusinessWeek, 10/2/08) amid fears of a deep global recession, the TCS deal shows executives are nonetheless confident Indian software service providers will remain competitive in tough times. The Citi contract is the biggest win ever for an Indian company. TCS edged out contenders such as IBM (IBM) and French IT company Capgemini, and the promise of steady business from the deal encourages some analysts. "The revenue visibility in the TCS contract is a big plus in this tumultuous market," says Abhiram Elaswarupu, IT analyst at BNP Paribas in Mumbai.

The Citi deal helps TCS go up against its big foreign competitors directly. Unlike IBM, Accenture and EDS, all big players in India, homegrown companies typically have operated with smaller-scale deals, lasting two to three years and worth $50 million to $200 million. Just last October, TCS had crossed the $1 billion threshold (BusinessWeek.com, 10/18/07) when it signed a 10-year, $1.2 billion contract with Dutch group Nielsen, which owns ratings major ACNielsen.

Expanding Exposure

Acquiring Citi's unit brings 12,000 new employees into the TCS fold and is expected to generate revenues of $280 million this year. Currently, TCS, which has over 10,000 employees in its outsourcing units across the world, makes more than $150 million providing services to Citi alone.

TCS has been providing IT services to Citi since 1992, catering to the bank's operations in North America, Europe, India, Singapore, and the rest of Asia Pacific. As with most big Indian software providers, banking and financial services form a big chunk of TCS's business, accounting for 43% of revenues. The new outsourcing contract will nudge it a percentage point ahead, says a TCS manager.

With the world's financial industry in turmoil, this isn't the best time for an Indian outsourcer to be expanding its exposure to the sector. However, analysts say they are more concerned about TCS overpaying to acquire Citiglobal. TCS should have negotiated a better deal, given the fall in company valuations that has accompanied market meltdowns around the globe, they say. TCS claims the price is justified and argues the acquisition will help the company serve not only Citi but other customers as well.

Still, some analysts are skeptical. On Oct. 8, the day TCS announced the deal, its shares closed down 5%. Year to date, it's off 49%, compared with a 35% drop for the benchmark Sensex index. John McCarthy, a vice-president at research firm Forrester Research, warns the track record for Indian companies using acquisitions to expand their customer base is not great. "The BPO industry is littered with deals like this one that have not led to large-scale work beyond the individual clients," he says.

McCarthy believes TCS's latest buy is a long-term play. "This is about ensuring that when the dust settles [after the Wall Street crisis], TCS is well positioned to help the client clean up their mess of systems and do new projects," he says. "Anything beyond that is wishful thinking."

The TCS buy is the latest example of Indian software majors aggressively expanding to other geographies to reduce their reliance on the U.S. Over the past three years, TCS has made purchases in Switzerland, Chile, and Australia. Last year rival Infosys Technology (INFY) bought out the outsourcing business of Dutch electronics major Philips, and Wipro (WIT) acquired U.S.-based, Nasdaq-listed outsourcing outfit Infocrossing. Infosys and New Delhi-based HCL Technologies have been battling for SAP's consulting company Axon; on Oct. 10, Infosys announced it was backing away from the deal, giving the win to HCL.

Lakshman covers India business for BusinessWeek.

Thursday, October 9, 2008

MARKETWATCH FIRST TAKE

Citigroup's baffling call on Ford, GM

Commentary: Tossing Main Street skeptics another bone

By MarketWatch

Last update: 1:18 p.m. EDT Oct. 8, 2008

SAN FRANCISCO (MarketWatch) -- Citigroup Global Markets issued a 37-page research report Wednesday recommending investors dump their shares in General Motors Corp. and Ford Motor Co.

To many out there on Main Street, this looks like a serious grasp of the obvious.

It's also another example of why confidence in Wall Street has ebbed nearly as low as the two struggling carmakers' share prices.

Specifically, shares of GM (GM

General Motors Corporation

News, chart, profile, more

GM) are down 82% over the past 12 months, trading at a 56-year low.

And shares of Ford (F

News, chart, profile, more

F) are down 73% over the same interval.

Until Wednesday, Citigroup had labeled both stocks a hold.

The report goes to great lengths to explain mounting pressures on the companies. Chief among them: what the Citi calls intensified caution, deteriorating global credit conditions, and unappealing valuations.

"After maintaining a cautious stance on automaker stocks throughout the past several months, we believe the risk-reward balance has tilted decidedly negative on both absolute value and relative value versus underperforming suppliers," Citi writes in its note.

Huh?

This is the byzantine language of Wall Street. It raises serious questions about analysts' perception of reality and their ability to communicate to those millions of Americans who make up the investor class -- those whose retirement hinges on fast-shrinking 401(k)s.

Why cloak simple stock recommendations in impenetrable prose? Unless analysts are writing for themselves, they need to say in layman's terms why Ford and GM are now a bad bet.

Another obvious problem is the timing of the note. If these guys are so astute, why did they wait until Ford and GM were grinding along at historic lows before deciding they should be jettisoned?

Investors with only a rudimentary understanding of the market could see months ago that these companies are in the fight of their lives. How else to explain their share prices?

When all is said and done, Citi's note looks like a backside-covering maneuver, far too late to do any good and perhaps even harmful.

Common shareholders' growing distrust of Wall Street, and the reckless abandon that has plunged the world's economy into its worst crisis in decades, is well founded.

You have to wonder if this latest report won't be read by the skeptics as an inadvertent buy signal.

-- Jim Jelter

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Citigroup's baffling call on Ford, GM shares - MarketWatch

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Printed from

US patent office's notice floors legal outsourcing
9 Oct, 2008, 0137 hrs IST,Durba Ghosh & Harsimran Singh, ET Bureau

NEW DELHI: The US slowdown has kicked off a heated debate in the US legal circles. At the heart of debate is a recent notice by the United States

Patent and Trademark Office (USPTO) barring companies who send information overseas regarding inventions and patents without government clearance. While some believe offshoring is good as it cut costs for legal firms, lawyer groups in the US are against it.

Treading on extreme grounds, some also believe the notice might sound a death knell for the LPO industry, while a section of Indian lawyers believe it is the result of hectic lobbying by a section of US law fraternity.

"It is the vested interest of a group, which is blowing it out of proportion. The notice does not mean much to us since we do not outsource any sensitive information. Some percentage of the LPO industry might be affected due to the market sentiment, but it will have no bigger impact," said CPA Global's India head Bhaskar Bagchi. CPA is one of the largest LPOs in the world.

Meanwhile, the Wall Street meltdown has resulted in a slew of bankruptcy filings, due diligence and lawsuit drafting work, a lot of which is being outsourced. Many believe that the US notice is just a ploy by anti-outsourcing lobby to prevent more of such work going to India. The cost of preparing a patent application in India averages about $2,000, whereas the cost to prepare the same application in the US ranges between $8,000 and $15,000. The median annual salary of a lawyer in the US is about $95,000, while in India it's around $20,000 per year. (I can believe that the $95,000 guy isn't outsourcing to the $20,000 guy and pocketing the difference). The primary function of this notice is to prevent publication of an application as a patent where such disclosure would be detrimental to the US national security. Additionally, the Act provides for the licensing of applications for export for the purposes of filing for patents abroad.

Says Mumbai-based LPO, Pangea3's co-founder and CEO Sanjay Kamlani: "This notice is just a reiteration of a rule that already existed before. In my view, by this notice, the US government accepts outsourcing as an inevitable part of economic transactions." However, some US attorney's look at it very differently. "Finally, someone has noticed that our export laws prohibit the sending of information relating to technology overseas without a proper license. This should signal an end to the $2.2 billion per year patent outsourcing to India. For admittedly selfish reasons I am happy that export regulations will now be enforced as written," writes a pro-regulation US patent attorney, Gene Quinn in his blog.

There's other section of the US legal fraternity, which has a different view. Last month, American Bar Association (ABA) came out in full support of outsourcing saying there was nothing "unethical" about it. The ABA's observations come in the midst of a long-running debate in the US and other Western countries over fear of job losses from outsourcing to places like India.

In the legal arena, the opponents of outsourcing practice have said there were additional concerns such as professional ethics and confidentiality. "The notice does not explicitly ban patent offshoring. USPTO has just reinstated a policy that has always been there. All the companies in this space adhere to the given guidelines," added Mr Bagchi. However, Pangea3, one of the leading LPO players, has drafted a formal response to its clients explaining how the notice impacts the current patent prosecution work outsourced to India. At present, the Indian LPO industry is worth $240 million and industry sources predict that this will grow to over $640 million by 2010. Also, the industry currently employs around 7,500 people, which is expected to reach 32,000 by end of 2010.

Financial Times FT.com

Tata buys Citi's Indian outsourcing arm

By Joe Leahy in Mumbai

Published: October 8 2008 14:16 | Last updated: October 8 2008 14:16

Tata Consultancy Services on Wednesday bought Citigroup's Indian business processing outsourcing unit for $505m in a deal that could become the first of many as global financial services groups seek to raise capital to weather the credit crisis.

As part of the deal, Citigroup has agreed to guarantee it will source $2.5bn of services over more than nine years from the unit, Citigroup Global Services, making the US firm TCS' largest client with around $500m of business a year including other contracts.

For TCS, the deal will enable it to offer a range of financial transaction services to clients other than Citigroup, a move India's largest outsourcing company hopes will catapult it to the lead of the financial BPO industry.

"Now we have the opportunity to take it [financial BPO services] to a number of other clients – that's a huge growth opportunity especially under today's market conditions," said N. Chandrasekaran, chief operating officer of TCS.

The deal represents a bet by TCS that once the global credit crunch bottoms out, financial groups will begin to outsource more of their core back office processes, such as handling customer transactions, to third parties to try to cut costs.

It also continues a trend among multinationals of offloading their "captive" business process outsourcing units in India to third party vendors to streamline their operations and raise capital.

This week, Japanese securities firm Nomura bought the back office operations of Lehman Brothers in Mumbai while in 2004, General Electric sold 60 per cent of its Indian back office unit, today known as Genpact, to private equity firms.

Citigroup Global Services employs about 12,000 people and is expected to generate sales of about $278m this year.

"This transaction is expected to help reduce operating expenses related to business processing and will allow us to focus on our core financial services competencies," said Don Callahan, chief administrative officer of Citigroup.

Citigroup Global Services' margin based on earnings before interest is 20 per cent, according to Mr Chandrasekaran.

He said the outlook for the Indian outsourcing industry presently was still negative, with clients waiting for a resolution of the credit crunch before committing themselves to new outsourcing contracts.

But he said by the time the acquisition was fully consummated in the first half of next year, he expected clients to be more willing to start outsourcing additional operations and processes to cut costs.

"We just need the uncertainty to be over – when uncertainty is there, clients won't take positions," said Mr Chandrasekaran.

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Monday, October 13, 2008

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Outsourcing industry needs to evolve to high-skill services

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