Global IT Outsourcing Spending 2002-2015, Forecast - Stable growth in near future; Are Indian Outsourcing Vendors prepared?

Source: Gartner Inc. 2010-2012 – Press releases. 2013-2015 Forecast: IT Services, 2008-2015, 2Q11 Update. June 16, 2011  

Worldwide spending for IT outsourcing (ITO) services is on pace to reach $251.7 billion in 2012, a 2.1 percent increase from 2011 spending of $246.6 billion, according to the latest outlook by Gartner, Inc. European Sovereign Debt crisis and economic volatility in the United States are the major reasons why the YoY growth fell to 2% form 8% in 2011. Businesses in Europe and United States are slashing their IT spends and budgets in the past year and most of the Indian Outsourcing vendors hinted that clients spending and budgets will either remain flat or will be cut down in 2013. NASSCOM too lowered its growth forecast for 2012-13 for IT-BPO exports to 11-14 percent from previous fiscal’s target of 16-18 per cent growth. While the global macroeconomic scenario remains uncertain in the coming years, the industry will continue to exhibit resilience and adaptability in continually reinventing itself to retain its appeal to clients, NASSCOM said. Indian Outsourcing vendors achieve 90% of revenues from North America and Europe and these dependencies has been a worry for Indian vendors and are looking to focus on other geographic locations for future revenues particularly domestic revenues in India.

In North America, Gartner expects that buyers will seek to transition more IT work to annuity-managed service relationships for cost take-out and IT costs. This will keep ITO growing through 2016. Enterprises' reluctance to hire or make large capital purchases, as well as their pursuit of asset-light IT strategies, continues to push clients toward consuming externally provided services. North America is the largest contributor of revenues to the Indian outsourcing vendors.

A challenging economic scenario that worsened in late 2011 continues to affect the government policies and end-user sentiment in many key European countries, resulting in a forecast for Western Europe ITO growth decline of 1.9 percent in U.S. dollars during 2012. Reinvigorated economic pressure is delaying the willingness of many commercial organizations to focus on enhancing competitiveness rather than cost reduction. In addition, the European public sector will continue to see a cautious budget environment throughout 2012. This will force many central and local government entities to concentrate on outsourcing initiatives aimed at reducing IT cost through IT efficiencies and rationalization, according to Gartner. Europe is the second big contributor of revenues to Indian Outsourcing vendors.

Spending on ITO in the Asia/Pacific region will grow 1 percent in U.S. dollars in 2012 and exceed 2.5 percent growth in 2013. With the exception of Japan, Australia, New Zealand, and to a lesser degree, Singapore and Hong Kong, the countries in Asia/Pacific are quite new in terms of outsourcing usage, understanding and sophistication. The growth is being driven by the large inflow of capital into Asia over the past three to five years, leading to the need among global and regional businesses to scale up their operations, according to Gartner. Asia pacific revenues are slowly increasing for the Indian vendors and all the vendors are targeting domestic deals for rising revenues within India. Indian service providers will look at establishing centers in China and other APAC regions to reduce the dependency on the America region.

Indian Outsourcing vendors both large and medium vendors are bracing themselves for the new normal which is the volatile macroeconomic environment and slowing down of the IT spending by companies. Even clients are looking beyond mere cost cutting and they want vendors to play an active role and share responsibility for improving the business outcomes and do work which affects the profitability of the company. Indian outsourcing vendors are betting on four “powerful” technologies—cloud, analytics, big data and mobility—and are believing that these technologies are  transforming the industry and providing the vendors an opportunity to increase the nonlinear revenues, which revenues not related to increase in headcounts  and also increase margins. There have been significant investments made on the development of products and services that help the clients to deal with technologies like social media, cloud, analytics and mobility (SCAM) to optimize and ensure efficiency in business environment. Acquisitions are another way in which the Indian outsourcing vendors are looking up to acquire skills and domain expertise in the above mentioned four technologies and there has been significant number of them in the last couple of years.

Discussion Points:

      1. Will betting on Social media, Analytics, Big data, mobility and Cloud Computing help Indian Outsourcing vendors to overcome the slowdown and increase revenues?
      2.Indian Outsourcing vendors are banking on acquisitions for building the capabilities in the above mentioned four technologies. Will this inorganic growth strategy work? 
      3. How to overcome the talent and skill shortages in the above mentioned technologies and how to build required talent at fast pace? 

Indian Outsourcing Vendors looking to increase Outcome based pricing revenues in 2013

The $100-billion Indian IT sector is bracing itself for tough fiscal 2013 triggered by volatility in developed economies like the US and Europe who are the major outsourcers of both Information technology and Business Processes to Indian Vendors. Discretionary spending and overall IT budgets and spending has been reduced significantly by both the US and European companies which has forced to look at innovation, acquisition led growth and outcomes based business to compete against the dominant multinational vendors like IBM, Accenture, etc. For years Indian outsourcing vendors have focused on cost reduction for clients achieved through mostly labor arbitrage as Indian manpower cost was one third of the resource cost in United States and adopted the 'time and material model', in which companies charge clients based on the number of engineers working on a project and the number of hours they put in. Worldwide spending for IT outsourcing (ITO) services is on pace to reach $251.7 billion in 2012, a 2.1 percent increase from 2011 spending of $246.6 billion, according to the latest outlook by Gartner, Inc. Indian Outsourcing vendors used to have good visibility of the client’s spends and budgets and accordingly provided their revenue guidance and future outlook and also plan their operations. But things have changed forcing Indian vendors loosing visibility of clients budgets and as Infosys CEO S.D. Shibulal said “I think the world is in a new normal. It will continue to be volatile and uncertain. Corporations will have to adjust and become more aware of this and learn to operate in these conditions.”

The renewed focus on business outcome based pricing model is due to the recent advertising campaign launched by mid-tier player iGate in US titled "Conspiracy Uncovered" published majorly in the New York Times, Wall Street Journal and the Financial Times welcoming American companies to switch to 'business outcomes model,' where a service provider shares the risk of clients and gets paid only when they achieve business outcomes. “The arch enemy of big corporations isn't recession. It's the outdated, inefficient time and material model, which forces you to pay the outsourcing services vendor, even when a project fails," claimed the company CEO Phaneesh Murthy. Apart from the Time and Material model Indian outsourcing vendors also use a fixed-price model, where project costs are agreed in advance irrespective of the number of engineers working on it or the number of hours they put in. Time & materials model contribute to 50-58% of the revenues for the Indian outsourcing vendors. Post the $1.2billion acquisition of Patni Computers in 2011, iGate is looking to compete with other big Indian Vendors like TCS, Infosys, Cognizant, Wipro and HCL Technologies and this advertisement is one of the ways in which it is trying to draw attention to the American and European companies. In 2007, TCS ran a marketing campaign titled "experience certainty", which highlighted the message of dependability of its services.

iGate through its ad campaign advising clients to move from fixed price contracts to outcome-based models and it is signaling it as a larger global shift in outsourcing models. But most of the Indian outsourcing vendors particularly TCS, Wipro, HCL Tech and Infosys have been focusing on the outcome based model as early as 2005 when HCL Tech highlighted its focus on this model by signing some deals. Most of the Indian vendors have been offering the outcome based pricing for years and also have traction in this but not as much as compared to the traditional Time and Materials model and fixed price model. Between 2007 and 2009 major Indian outsourcing vendors had even announced during that time they are targeting 30-40% of revenues based on outcome based pricing model in next two three years but this did not happen. Outcome-based pricing, which is based on actual performance, does not follow the linear model which banks only on the number of people deployed for a contract. In 2012, 15-20% of offshore contracts are expected to run on the outcome-based model, in which the vendor gets rewarded for reduction in product costs, increased working capital, volume of sales and improvement in bottom line. Large Indian vendors are depending on the vendor consolidation/churning and mid-cap IT companies are relying on segregation of large deals into smaller ones and most of these deals that will be renewed will definitely have the outcome based pricing revenues.

But all the Indian vendors are treading cautiously in terms of increasing the percentage of the outcome based pricing revenues as there are certain prerequisites for this model to be successful like clear and thorough understanding of the client’s business models, understand the client’s business operation and industry best practices, understand the risks involved in this model like failure to deliver as agreed will lead to clients not paying which directly affects the revenues, a comprehensive contractual agreement between the vendor and the client that should factor in all the risks and all the data, reporting formats, details of the pricing and deadlines/milestones and both the vendor and client should understand the contractual terms and agreements thoroughly and sign off accordingly. Acquisitions done by Indian vendors for the outcome based pricing include TCS acquisition of Diligenta and HCL Tech acquisition of Axon, which highlights that all the major Indian Vendors are looking at acquisitions to acquire new capabilities and strengthen domain specific expertise. What ultimately matters for the success of the outcome based pricing model is strong relationship between the outsourcing vendor and the customer for the successful implementation of this pricing model. Clients are expecting Indian vendors to deliver high value other than mere cost cutting and expect the vendor to work closely with them on improvements that has significant business outcomes. Technology trends such as cloud computing and big data are supported by technologies such as social media and smart devices to create new services are most suited for outcome based pricing models and all Indian Outsourcing vendors have invested significantly on these technologies and offering clients new products and services.

Discussion Points:
1.What is the percentage of revenues in terms of the total revenues should Indian Outsourcing vendors target from outcome based pricing models?
2.What should they do to prepare themselves to offer outcome based pricing to their clients in terms of human resources and technology capabilities?
3.What are the risks involved in this model and how does the vendors have to factor them so as to overcome any significant loses?

India Healthcare BPO 2013 – ICD-10 conversion next Y2K of healthcare

The US healthcare industry is about $1.8 trillion in size and is expected to be about $2.5 trillion by 2018. The healthcare revenue cycle market (claims processing) is estimated to be about $11 billion segment representing only the provider segment and in this segment around $3 to $4 billion is outsourced globally and Indian healthcare BPO vendors currently have a  share of only about $300 to $400 million. Claim processing and settlement, i.e. healthcare revenue cycle management, is one of the core services in the health insurance industry and has to be handled promptly and accurately and Indian vendors are handling this work effectively. The Indian Healthcare BPO story started with basic claims processing (data entry) and over time India has become preferred destination for US Healthcare and Insurance companies to outsource their medical coding work including in-patient coding work, which is a complicated process. There is also a lot of growth in the claims adjudication space and other insurance company related work that is being done in India. The global healthcare BPO market is growing at a CAGR of 21.4%.

Healthcare provider outsourcing has the highest growth rate of 31.9% from 2013 to 2018 because of the conversion from ICD-9 coding system to ICD-10 coding system to be implemented by October 2014 in the US. Healthcare payer outsourcing market will also grow at about 30% in the forecast period. Omega Healthcare President and CEO Gopi Natarajan explained that the transition of the medical coding process from ICD-9 (The International Classification of Diseases) to ICD-10, a standard used in the US to classify diseases, is slated for October 2014 throughout the US, and is expected to be a huge boost for the outsourcing industry. Manish Hemrajani, Executive Director and Senior Analyst at Oppenheimer & Co. Inc. says Genpact, EXL Services  and WNS have traditionally served the BFSI verticals, but they are now moving increasing their exposure to health care, one vertical where he expects meaningful growth. He says the transition from ICD-9 to ICD-10 is expected to translate into a meaningful amount of business. “The differences between ICD-9 and ICD-10 are significant, and none of the payers or providers in the health care industry are ready for it with a deadline set for October 1, 2014, and that’s where the BPO vendors come in. So you’re going to see a meaningful growth coming from health care in this space. Some are touting it as the Y2K of health care.”

ICD-10 is the new version of the World Health Organization's International Classification of Disease. The 155,000 codes in this massive compendium are used on everything from hospital records to insurance claims to death certificates. Most of the Indian Healthcare BPO vendors have set up separate practices for this and are well prepared to offer the conversion services to the US clients. ICD-10 is going to require a large amount of changes and training the new codes will affect medical collections for both patients and providers. Indian Vendors help the clients in transitioning their systems and coding mechanisms to the latest ICD 10 system and also help in providing training that is required to use the codes. Practice managers or billing staff must be trained on all the details of the new system, patients too have to know about the coding changes will impact the amount they pay on insurance claims as well as nurses, doctors, and other staff members that will come into contact with diagnosis codes. 

Discussion Points: 
1.How are Indian Outsourcing vendors targeting the ICD-10 conversion projects and are they profitable? 
2.What type of talent and skill sets required for ICD 10 conversion projects and availability of talent in India?
3.Since ICD 10 conversion is a temporary project, what should Indian vendors do post the expiry of conversion projects?

Outsourcing Deals Slowing down: Should Indian Outsourcing Industry worry in 2013?

Indian IT-BPO industry aggregate revenues crossed the $100 billion mark and exports reached $69 billion in FY 2011-2012 and within the global outsourcing industry, India had increased its market share from 51% in 2009 to 58% in 2011, highlighting India’s continued competitiveness and the effectiveness of Indian providers in delivering transformational benefits. As a proportion of national GDP, the sector revenues have grown from 1.2% in 1998 to an estimated 7.5% in 2012, says NASSCOM. The industry has seen a tremendous growth earlier but since past few years the year on year (YoY) growth rates have been falling reflecting the effects of the 2008 financial crisis and also the present European Sovereign Debt crisis.  Continuing on the decline the $100-billion IT industry is expected to meet the lower end of 11-14% growth projection in FY2012-2013, according to NASSCOM and the revenue from IT exports is estimated at $75-77 billion for the current fiscal year.

                                                                   

Analyst firm Ovum said that the total contract value (TCV) of outsourcing deals fell a record 30% during the Q3, 2012; lowest in nine years and TCV of IT services deals announced in the three months ended September 2012 was $18.9 billion, down 33 per cent on the same period in 2011. The volume of deals fell sharply to 332 from 438 last year, representing the least activity in five years which highlights that companies are no longer aggressively outsourcing their IT and business processes, which also hit an 11 year low. TCV is a measure by which outsourcing deals are valued. Add to that the fact that public sector or government-owned companies have also reduced their outsourcing spends, which, according to Ovum, is at a three-year low. This data also highlights the fact that the Indian IT sector is facing one of its most turbulent years in its short history.

Infosys told analysts that the demand environment continues to be weak, and led some of them to conclude that the company may lower its annual growth guidance to 3.5% compared with the current growth target of 5%. Even the star performer Cognizant that has been consistently growing by 20% YoY has recently announced that its board had set a revenue growth target of 16% for 2013, which will be used as a base to determine whether its top executives will earn 100% of their equity incentives for the year which shows that their growth will also slowdown from 20%. Tata Consultancy Services (TCS) on the other hand is positive and hopes to keep up its double digit growth for the current year. Both TCS and Cognizant have said growth is expected to be lower in the December quarter, 2012 and in FY2013, respectively. The recently announced results of Accenture too indicated slowdown where the growth of outsourcing business segment has seen fall in growth compared to previous quarter and consulting services flat.

The National Association of Software and Services Companies (NASSCOM) has said that the Indian IT industry is likely to meet the lower end of its growth forecast of 11-14% for FY2012-13 as customers tread cautiously on technology spending due to global economic uncertainty and companies in United States, who are the largest outsourcers to India and businesses in Europe that are increasing their outsourcing to India are curbing spend and reducing their IT budgets in a difficult business environment. The statement, made for the second time since September, comes after several IT firms gave guidance which was lower than the industry body’s forecasts. Banking Financial Services and Insurance companies that dominated outsourcing to India are facing severe troubles in their businesses and are forced to reduce their outsourcing spends.

Discussion Points:
1.European Sovereign Debt crisis and volatile US economy is expected to continue next year in 2013, what should Indian Outsourcing Vendors do to tackle this?
2.Overall the Outsourcing Industry is not expected to keep up the double digit growth rates which is happening all these years, the growth rates will slowdown and are Indian vendors prepared for this new normal?
3.Indian Outsourcing vendors have to definitely shift their Geographic focus from US and Europe to other locations. So where should they focus? What about Indian Market?