IT Outsourcing Witnesses Growth from New Markets and Divesting

By Chris V.

Company leaders are compelled to creatively move their businesses to profitability by unloading excess baggage and looking for new markets. Hence, a growing number of companies are divesting to achieve a leaner structure and at the same time looking for new markets to tap into.

IT Outsourcing Providers Tap into Domestic Market

With the current pressures faced even by Outsourcing Providers, especially the IT service providers, as the demand for it this year is expected to decline by 1.7 percent according to Gartner, they are continually challenged to develop sharper eyes for new markets to target and new ways to make it more cost competitive.

Infosys Technologies Limited (INFY) and Wipro (WIT) are teaming up with rural service providers to be able to create a service offering for India’s domestic market. By recruiting rural talents, Infosys and Wipro will be able to offer cheaper services to the domestic market. This strategy then will allow them to cash in a similar gross margin for domestic and international business.

This kind of local partnership will be an interesting phenomenon to keep an eye on. Aside from achieving cost efficiencies it also expands talent pool diversity as well as decentralization of economic growth in outsourcing hubs like India, China and Philippines.

Manila and Cebu for instance are the major outsourcing hubs in the Philippines hosting the offices of TeleTech Holdings, Inc. (TTEC), Convergys Corporation (CVG), eTelecare Global Solutions, Inc. (ETEL) and Aegis Group plc to name a few. These providers should consider partnering with other provincial companies or even provincial governments. Although investing on rural talents should not be merely an attempt to reach head count and put quality at risk. High standards should be maintained by scrutinized hiring and continuous employee training otherwise risking global deals and reputation.

IT Divisions Transfer to Outsourcing Providers

Aside from tapping into new market, IT service outsourcing providers also enjoy growth from company divesting.

Lloyds TSB (LYG) announced two weeks ago that in order to attain cost efficiencies, it will be outsourcing a major part of its IT division, replacing 80 percent of its local IT workforce with those from top Indian tech outsourcing firms such as Wipro and TCS . Similarly, Barclays (BCS) will also be moving its global infrastructure and service delivery (GISD) to India, Hungary and Singapore as a move to become leaner. More job cuts in IT jobs globally are expected to come according to Ralph Silva of Towergroup.

Carrefour (CRERY.PK), a French retailer operating supermarkets expects to cut costs by EUR4.5 billion over the next three years. This news increased its stock price by 5.7 percent. As part of its leaning process, Carrefour signed a EUR 180 million IT management and maintenance deal with technology outsourcing giant IBM (IBM). The outsourcing deal is expected to make Carrefour cut down energy expenses and increase its security and upgradeability levels.

If companies are looking for new markets beyond its geographical zone, individual talents and even governments should exercise the same keenness as well. Outsourcing is an evolving business which not only changes companies but also people.

Disclosure: No positions.

Comments

[Sonal:]

Growing market and increase in revenue is a great thing. Hopefully it's a kind of boost that IT sector is looking for. This will give cost savings to companies who wish to save the maximum in this crunch time. With companies like Barclays and Llyods outsourcing the future looks quite bright. It's a get set ready time for IT service providers.

Jul 16 12:31 AM

[SourcingMan:]

I would not be as positive yet. Get set ready is good, but the market is still slow, decision making is even slower. Banks especially are seeing good numbers for H1, but they all expect a softer September / H2. Service providers should yes gear up, but should also realistically expect a longer and uncertain sales cycle. I still view Q1 of 2010 as the real inflection point for the IT services market. As for BPO, there is next to nothing worth mentioning in the pipelines, 2009 will be a very weak year for the sector, especially for EU which has been the engine for growth in the past 2/3 years.

Jul 16 06:58 AM

[David Collins_:]

Intelligroup, Inc. (OTC BB: ITIG) an ERP-focused IT services provider reported improved bottom-line results and strong cash flow on flat sequential revenue, showing you can focus on profits during a tuff biz environment. ITIG has $20 million in cash and no debt, making its valuation attractive at current levels.

www.intelligroup.com/i...

We represent the Company in its IR effort.

Jul 30 10:52 AM