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?