India Outsourcing Industry 2012 – Outsourcing Contract Renewals critical growth factor for Top 4 India Vendors

Outsourcing contract renewals are critical for India Outsourcing Vendors growth (revenues & volumes) and these renewals have been contributing significantly for the Indian vendors since the 2005 when they started bagging the mega deals (multi year multi-million dollar deals). Mega deals were the forte of the Big Six Vendors (IBM, EDS, CSC, Accenture, ACS, and HP) and Indian Outsourcing vendors won 80% of the deals that were renewed during the 2004-06 period and first generation of renewals kick started the growth of Indian Outsourcing Vendors and they successfully broke the dominance of Big Six Vendors through competitive pricing. Renewals can be simple like renewing the deal with existing vendors based on existing terms or addition of new terms to extensive changes like changing the vendors like adding new vendors, new RFPs, renegotiating prices, changing policies, technologies,  and changing business environments. Post the financial crisis and subsequent economic slowdown in 2008, outsourcing deal renewals have gained prominence as clients were looking for cost reductions during the crisis and Indian Vendors again captured this opportunity and offered clients not only competitive pricing but also offered innovative service offerings that has significant impact on the clients profitability and revenues. A report by Standard Chartered Equity Research estimate a pipeline of at least 1095 outsourcing deals worth over $207 billion over 2011-16 which could translate into a $25 billion opportunity for Indian Vendors.

Outsourcing contracts renewals not only focus on the cost reduction but also increased value from service offerings of vendors for the clients and clients are bargaining for big discounts which are driving down the value of contracts by 30% compared to previous contracts. Major IT vendors are forced to offer around 8-10% discounts on the billing rates.20% of the outsourcing contracts renewals are premature as clients are forced to renegotiate or bring in a new vendors due to poor vendor performance, changing business needs and change in business environment. The renewed outsourcing contracts have new clauses in contracts to ensure business continuity, stringent service-level agreements, ensure better IP protection and heavy penalties for failure. Another important change is that the deals are no longer larger in size and deals sizes have gotten normalized at the $50 million to $100 million range as mega deals have not achieved the expected cost savings or operational efficiencies. Clients are adopting blended outsourcing model in which large deals are broken into smaller deals for flexibility in pricing, delivery, etc and distributed among multiple vendors for optimal total cost of ownership. Standard Chartered Research report predicted that TCV deal size of $50-250m would be primary focus for Indian offshore vendors and the average contract period will be five years.

Outsourcing Contracts Renewals 2012

Renewal deals will drive the medium term volume growth for Indian Outsourcing vendors and there is a pipeline of 249 deals worth US$47 billion coming up for renewal in CY2012 which could convert into a US$6 billion opportunity for large Indian Vendors according to Standard Chartered Research Report. The report also expects Indian vendors will benefit from the smaller deals and expect annuity deals could contribute 26% of incremental revenues for Top4 players in FY13. Manufacturing followed by Technology, Media & Telecom (TMT), Retail and Transportation verticals dominate the renewal deals in 2012. BFSI outsourcing contracts renewals will be slow as some of the major deals would have been renewed in 2011. Also Europe, Middle East and Africa region clients will dominate the outsourcing renewals segment followed by Asia Pacific region. Outsourcing renewals deals will be low in Americas in 2012 compared to 2011. Overall the renewal deals will be the key growth differentiator for Indian vendors and players who have good position in Europe and Asia Pacific are expected to capture the majority of the renewal deals. IT Outsourcing deals worth US$25 billion (approx) followed by Infrastructure services worth US$15 (approx) and Application Services worth US$7 billion (approx) are coming for renewals in 2012. Large Indian vendors have good expertise in ITO and Infrastructure services deals.

Top 4 India Vendors – Annuity Deals Renewals

TCS is the leader with 36% market share in the US$ 50 million+ deals and is expected to sustain its volume leadership. Over the last four quarters TCS has signed a mega deal worth US$2 billion (TCV) with UK based Friends Life through its subsidiary Diligenta and 21 US$50 million+ deals. TCS has significant presence in the BFSI segment and its is expected to pick renewal deals in this segment and also has significant portions of revenues coming from Telecom and Retail segments and these two segments too have some major deals coming for renewal in 2012. TCS has healthy deal pipeline and company is bidding only on specific projects that are coming for renewal.

Infosys is another vendor that is expected to do well in renewal deals space and is expected to gain around US$1 billion of revenues in 2012 and 2013. Company is very strong in Application development & maintenance which constitutes smaller opportunity and not so strong in the ITO and Infrastructure services segments. Infosys has strong presence in the Manufacturing, Telecom and Retail segments in which there are major annuity deals renewals in 2012. BFSI segment deals renewals are slow in 2012 and the company has significant exposure and dependence on this vertical. Infosys have been able to renew most of the deals with its existing clients but the contract values have come down and major clients of Infosys particularly in BFSI segment are going through a very tough time which is evident from Infosys management recent negative commentary on their Client’s IT spending/budgets.

Wipro had gone through a major reorganization in 2011 and the new management is slowly bringing back growth by focusing on large deals and improved operational flexibility for client account managers. StanChart report estimate US$700 million+ deal wins in 1H12 vs. US$400 million in FY11 and Wipro has strong ITO & Infrastructure Services  capabilities (37% share of FY11 IMS revenues among Top4) are a positive, especially given the significant 36% share of IO deals in the USD 207 billion renewal deal pipeline. Wipro has strong presence in TMT, manufacturing, retail & transportation segments where there are renewal deals in 2012. Wipro is aggressively bidding on some of the renewal deals and is expected to win some of them in 2012.

HCL Technologies is aggressively targeting for capturing 30% of total renewal deals in 2012 which provides a US$15 billion market opportunity as there is vendor churn in the market.  StanChart report expects HCL to sustain volume growth ahead of peers (21% CAGR over FY11-14E vs. 15%-19% for larger peers) on back of aggressive large renewal deal pursuit. HCL`s strong IO capabilities (25% share of FY11 Top4 IMS revenues) are a positive given significant share of IMS deals (36% by TCV) of the USD 207 billion renewal deal pipeline over the next 5 years. HCL management believes that many clients are unhappy with their vendors and they are hoping new vendors will solve the problems in new ways and company is sacrificing margins by offering aggressive pricing to capture the renewal deals and management hopes to recover margins through reducing SG& A costs, increasing utilization rates, recruiting more freshers, etc. HCL has strong presence in Manufacturing, Telecom, Media and retail segments where there are significant renewal deals.

Renewals Key Growth Driver

Outsourcing contracts renewals are the key growth drivers and differentiators for the Top 4 Indian Outsourcing vendor’s growth in 2012. Their focus on these deals since past couple of years has helped them maintain their revenue growth and profitability even in times of global economic crisis and slowdown.  India vendors focus on the smaller and mid size deals along with the large mega deals helped them grow and the deal sizes are becoming smaller as clients are looking to outsource to multiple vendors that offer them low pricing and provide more value added services that have direct impact on the clients’ revenues and profitability. India Outsourcing vendors are good at offering clients innovative service delivery models and have developed significant expertise to run the clients operations effectively and at low cost. Along with renewals India Outsourcing vendors are also profiting from vendor consolidation where clients are looking to consolidate many vendors to a few vendors that can really provide them with cost savings, process efficiencies and partner with the clients in developing and improving the products and services.

There has been very few transformational deals happening in the market due to the uncertain and volatile macroeconomic environment and clients are particularly looking to reduce costs significantly as it is the only way to overcome the crisis during which there will be pressure on the revenue growth. Indian Outsourcing vendors are facing tough times as the clients are bargaining hard and asking for discounts on billing rates, currency volatility, raising wage costs, slowdown in deals, macroeconomic uncertainty due to euro zone debt crisis, US Elections where presidential candidates criticizing Outsourcing of jobs to countries like India, and pressure on the margins. There have been major management and leadership changes that led to reorganizations in Vendors like Wipro and Infosys and this also had an affect on their performances. But the fact remains that Indian Outsourcing Vendors are expected to capture majority share of the outsourcing contracts renewals that are expected to happen in 2012 and most of the deals will be snatched from the Global Outsourcing Vendors.

Discussion Points:

1. What should Vendors do capture more renewal contracts deals?
2. What are the risks involved in Outsourcing Renewal Deals?
3. Since the Renewal Contract values are low and clients bargaining hard for heavy discounts, what should vendors do to protect their margins?
4. What should be vendor strategy in Vendor Consolidations and Long term transformational deals?

Procurement BPO - Procurement Outsourcing will see tentative growth in 2012

Procurement spending has direct impact on the organization profits as organizations spend around 50% of their revenues on procuring goods & services like raw materials, service & maintenance, etc (Direct), IT, HR, Marketing, legal services, etc (Indirect) and procurement function is responsible to acquire them at low cost and in sufficient quantities. Procurement has transformed from a mere functional role to a more strategic role and Chief Procurement Officers have gained prominence in the organizations and are also working closely with the Chief Financial Officers in PO decisions as there is direct impact on bottom line. Procurement outsourcing (PO) to captive or third party vendors helps to reduce cost (Direct & Indirect), improve efficiency and compliance and help businesses build long term, sustainable relationships with global suppliers. PO service providers have strong expertise in procurement outsourcing, generally charge fixed price for achieving certain cost savings and provide services like transactional procurement, strategic sourcing, compliance management, category management, tactical procurement and reporting. Major players in PO market are Accenture, IBM, ICG Commerce, Global eProcure, Xchanging, CapGemini, Corbus, Genpact, Infosys, etc.

Market Segmentation

According Everest Research, PO market in 2011 is expected to grow at 15% YoY to reach a market size of US$1.5 billion for multi-process PO, representing managed spend of around US$190 billion. In 2010, PO market actual contract value (ACV) grow 13% to reach US$1.3 billion with a managed spend of US$160 billion. According to Everest's projections, the PO market in 2012 will grow at 20% year-on-year and is expected to hit $1.8bn in annual contract value (ACV) - representing a managed spend of $250bn. Post the 2008 Global Financial crisis, PO market saw increased adoption and maintained a growth rate of 13-15% YoY as a number of key new contracts were signed. Customers outsourced their procurement functions like strategic sourcing spend, transactional procurement, spot buying, etc as they are looking to reduce costs and increase their profits. Charts Source: Everest Research

US followed by UK lead the adoption of PO with more than 80% of contracts signed followed by other European countries like France and Germany and Asia Pacific adoption is raising. Manufacturing, BFSI followed by the Consumer Packaged Goods and Retail sectors lead the adoption of PO. Mid Market companies have also increased the PO adoption. With PO traction on rise many smaller and niche firms with specific expertise in the PO area are entering the market and the traditional IT Outsourcing Service providers who till now are providing limited PO services are increasing their PO offerings through platform and cloud based offerings. Larger PO services players will see tough competition from smaller players.

Procurement Outsourcing Outlook 2012

Macroeconomic Uncertainty: PO will see sluggish growth in early part of this year due to worldwide macroeconomic uncertainty caused by the Euro Zone Debt Crisis and economic slowdown in US, but the PO market is expected to pick up in second half and lead to overall 20% YoY growth in 2012. European sovereign debt crisis is a major concern as the governments in the Euro zone are still struggling to find a solution which will have an impact on the PO market but the US economy is on recovery mode which will hold the growth in the market. France, Germany and UK are actively involved in tackling the euro zone crisis and monetary and fiscal policies by these governments in the euro region will have direct impact on the PO market as businesses and governments in these countries are the PO biggest clients. Higher unemployment levels in the US, UK and other buyer regions will force buyers to look at near shoring rather than outsourcing to low cost countries.

Currency Volatility is another concern as currencies like India Rupee is depreciating against dollar and Chinese Yuan strengthening against Dollar and Euro due to US pressure. Exports to India and China are becoming costly and exports from China and India are becoming cheap and cost effective. Indian Outsourcing vendors are seeing pricing pressures where in clients are renegotiating and asking to reduce prices as rupee depreciated significantly to dollar. Governments of Japan, US, China, India etc are forced to intervene in controlling the currency volatility. Wage inflation in low cost countries like India, China is also area of concern. Price inflation is also on the rise in these countries that is not only affecting the wages but also in the rise of cost of inputs & raw materials.

Supplier Risk due to Natural Disaster & Political uncertainty: Natural disasters in 2011 like Japan Earthquake & Tsunami that caused severe disruptions in supply and production of automotive, semiconductors, electronics, etc that had global effect, Thai Flooding submerged major production facilities of Hard Disk drives that led to supply shortages that in turn led to rise in Personal computer prices & storage devices. Political uncertainty in the Arab world, there was uprising in Egypt, Libya, Tunisia, Syria, Yemen and Bahrain had a short term effect on the oil prices and economies in these countries are still struggling to cope with the new democracy. Most of the countries are still running with interim governments and are yet to democratically choose their governments as elections are to be conducted in 2012. Businesses have realized that the supplier risk has a significant impact on their businesses and are working closely with PO service providers to identify and develop alternative sourcing, manage inventory and closely monitor the suppliers and assess risks.

Demand for End to End Solutions: Procurement outsourcing have seen significant changes in the past decade like strategic sourcing mania in 2000s when despite identifying huge savings potentials nothing can be done due to implementation constraints and supplier failures after which there was a shift towards technology adoption for automating everything from spend analytics and sourcing to order placement and billing. IT is driving the procurement outsourcing, with cloud computing and platform based offerings from the IT services providers buyers are looking for more cost reduction, compliance and efficiency in the procurement processes. Buyers are expected to adopt an end-to-end approach towards source-to-contract (S2C) and procure-to-pay (P2P) processes as M&A and partnerships between P2P and S2C providers are expected in 2012 to provide complete solutions. There will be a shift in trend in both outsourcing and supply chain management and deals are expected to expand into areas such as order fulfillment, inventory management, sustainability and logistics. PO services providers are offerings based on platform and cloud will not only attract large buyers but also the SMBs. Many of the providers are also providing real-time business intelligence to the vendors through E-procurement solutions.

Shifting focus back to Direct Spend: Most of PO services providers are focused more on the indirect spend as many businesses focused more on reducing spend on IT, HR, Marketing, legal services etc and presently PO service providers handle mostly indirect spending (70%). But there will be shift in focus back to direct spends as direct spend has direct impact on the bottom line, there has been reduction in volatility in raw material prices, supply issues due to natural disasters leading to shortages and buyers are more focused on indirect spends that have bigger savings and shorter procurement cycles. In early 2000s, the initial days of PO focus was only on direct spends (80%) but the focus shifted to indirect spend as buyers and service providers could not implement sourcing & procurement strategies in direct spends due to high volatility in raw material prices and long procurement cycles. More direct spend categories, such as maintenance and repair, are expected to become part of procurement outsourcing deals.

Vertical & Geographical Segmentation: BFSI vertical will continue its dominance in 2012 and verticals such as healthcare, manufacturing, distribution and retail will continue to witness increased traction. Other verticals like high tech, telecom, energy and utilities are also increasing their adoption. Everest believes public sector vertical will drive significant growth in 2012 as governments are looking to reduce costs and are adopting stringent austerity measures to reduce the deficits. North America will continue to be the dominant buyer geography, followed by Europe and Asia Pacific will see good growth. Buyers will continue to look for new sourcing destinations due to talent, cost, and risk diversification-related issues as low cost countries like India & China are seeing wage inflation and rising costs and are fast loosing their low cost advantages. With India, China and South Eastern Nations slowly loosing out their low cost advantages, Central and Eastern Europe (CEE), Latin America, emerging geographies such as Africa are attracting interest as global sourcing locations. There will be adoption of hybrid captive/third-party sourcing models by buyers and will definitely look to improve captive value by focusing on high-value processes. Captive investments will be made in the majority of setups and expansions mostly in the Asia Pacific and CEE geographies.

PO is expected to continue its growth momentum in 2012 despite the economic uncertainty and Everest expects that there will be rise in contracts size, CFOs will bundle Finance & Accounting Outsourcing & PO deals and increased focus on the global sourcing management and consolidation initiatives as buyers seek to profit from their existing sourcing channels. Everest also expects to see growth momentum due to the emerging technologies such as social media, mobility, green IT and cloud computing which will also foster innovation and evolution of new specialty providers. PO services providers will offer buyers’ innovative services that will help them reduce cost and improve bottom lines. There have M&A activity going on in the PO market since past couple of years and  expected to continue in 2012 as PO Services providers looking to acquire new capabilities and offer clients more services. PO market a critical component of overall BPO market has seen some significant changes in the past decade and success stories of buyers who profited from PO will lead to rise in adoption.

Social Media & Business Adoption 2011 - Internal Social Media platforms for Employees

Past five years saw Businesses increasing their presence in the social media and interaction with consumers also increased which led to increased investment in social media tools and platforms by businesses in 2011. Business Organizations have also become social businesses where in they provided various social media platforms for their employees within the organizations and in some cases even provided access to consumers and developer communities access to their internal social media platforms where in they interact, collaborate and share knowledge with one another. Employees are being trained about how to use the social media tools and mange their social presence and about the social media rules and policies. Employees are encouraged to develop and maintain content and are also allowed to even share personal content and form groups based on interest and hobbies apart from work based collaboration groups. Businesses have realized the importance of the social media how it helps in engaging employees, consumers, developer communities and other stakeholders and leads to innovation and development of new products and services and improving the existing ones.

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Social Media & Business Adoption 2011 - Businesses Adoption Slowing down

Overall social media business adoption have stagnated compared to previous years and many large companies do not have concrete presence or concrete social media policies. Social business survey by IDC shows that 41% of respondents have some sort of social business initiative underway and these projects vary from grassroots bottom-up employee initiatives to sophisticated and strategic social customer engagement programs. This leaves 59% who have not implemented a solution. According to a report by Center for Marketing Research at the University of Massachusetts Dartmouth, Forbes magazine Fortune 500 companies (Top 500 companies in United States) are using social media for their employee communications, but public-facing social media presence is lacking the attention of the company managements. The report says the adoption of blogs has slowed down as evident form data that 23% (114) have corporate public-facing blogs compared to 23% (116) in 2010. There has been a slight increase in both Twitter use (60% in 2010, 62% in 2011) and use of Facebook (56% in 2010, 58% in 2011). According to a report from KPMG International, more than 70% of organizations across the globe are active on social media and businesses in the emerging markets are leading in social media adoption compared to mature markets due to fall in cost of internet and devices.

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