Outsourcing Insider's  Instablog

With the United States market still in slump, businesses project difficulties in profit increase in the next 7 years. Job cuts continue in the US and the rate of job creation of 25 per year is not sufficient to offset job losses in the next 5 years. On the other side of the world, Indian outsourcing firms show an opposite trend. Global IT service providers such as Infosys (NasdaqGS: INFY) which provides technical consulting, design and development of business solutions have been aggressively increasing their workforce. Last week, the company reported that in the second quarter it has hired 6,069 people offsetting the 4,521 employees it laid off in the same quarter. Tata Consultancy Service (NSE: TCS.NS)is also bullishly hiring with plans of hiring 25,000 people worldwide for this year 2009 and 90% coming from India. Also part of the bandwagon is Wipro Technologies (NYSE: WIT). In October 15 Wipro CEO Azim Premji said that the company is planning to hire about 500 local employees for a new service centre by Jun 2010. Manpower India Director Cherian Kuruvila also highlighted this hiring trend by Indian outsourcing firms saying, “Companies are expected to build a talent pool for upcoming projects as green shoots are visible”.

Indian Outsourcing Firms Quarter Results UP

Major Indian IT providers such as Infosys and TCS have both reported an increase in their revenues for this quarter. Tata Consultancy Services reports a net profit increase of 29 percent bringing its quarter revenue from 12.62 to 16.24 billion rupees which beat the analyst forecasts. Indian software outsourcing giant Infosys Technologies also posted an increase of 7.5 percent on its quarterly profit. Wipro is to announce second quarter results this week and is expected to post an increase in its quarter revenue as well given its profitable business with the government and in France. In an EETimes article, Wipro Technologies France CEO Christophe Martinoli said that the company plans to strengthen their business in France to double its revenues and staff in the next 18 months.

M&A Trends

In the US, technology manufacturers have been busy acquiring IT and business solutions and services companies to expand their markets and product lines. Enterprises are now moving towards operation and business consolidation. They want to deal with just one major provider to take care of all their needs. Imaging company Xerox (NYSE: XRX) bought Affiliated Computer Services Inc (NYSE: ACS) for $6.4 billion.  Dell (NasdaqGS: DELL) has agreed to buy Perot Systems Corporation (NYSE: PER) for $3.9 billion. IBM (NYSE: IBM) also expressed its interest in purchasing Wilshire Credit Corporation, Bank of America’s (NYSE: BAC) BPO division.

Mergers and acquisition is also becoming a hot trend in India for the same reason that these major firms intend to become a one-stop-shop. While in the US the trend is to acquire companies within the same industry where technology manufacturers merge with technology solutions and services providers, in India acquisition is motivated by the desire to tap into another industry particularly utilities, transportation, logistics, aerospace and government. HCL Technologies (NSE: HCLTECH.NS) acquired Axon for $720 million. Cognizant Technology (NasdaqGS: CTSH) bought UBS Indian back office service provider for $75 million.

Building Expertise in another Field

As competition toughens and the demand for outsourcing services in traditional major markets such as the US and Europe, Indian firms have geared more attention to their domestic market as it offers a big opportunity. The domestic market allows Indian outsourcing firms to engage in larger and more diverse projects enabling its workforce to up their skill set in the value chain. Infosys signed a project with Indian railways and Hindustan Aeronautics. This opens the door for the IT giant to the transportation and aerospace markets.

It is interesting to see these differing trends across the globe. Both worlds intend to increase their profitability by expanding their markets although what differentiates them is the kind of consolidation they pursue in order to become a one stop shop.

Disclosure: No positions

In an aggressive attempt of major technology manufacturing firms to diversify its markets for more consistent revenue streams, they have been buying and bidding for business process outsourcing services firms.

Last month alone, technology giants Xerox (NYSE:XRX) and Dell Inc. (NASDAQ: DELL) have reported their acquisition of services companies, Affiliated Computer Services Inc. (NYSE:ACS) and Perot Systems Corporation (NYSE:PER).  On September 28, printer and imaging business leader Xerox announced its purchase of business process outsourcing firm Affiliated Computer Services Inc. (NYSE:ACS) for $6.4 billion. A week before that, Wall Street Journal wrote that computer maker Dell Inc. (NASDAQ: DELL) has agreed to purchase information technology services Perot Systems Corporation (NYSE:PER) for $3.9 billion.

With the economic downturn, tech manufacturing firms have found themselves heavily suffering to meet positive quarterly results. Xerox (NYSE:XRX) second-quarter total revenue of $3.7 billion this year was down 18 percent last year’s. Dell Inc. (NASDAQ: DELL) also experienced revenue decrease for this quarter of 16% from $16 billion last year to $13.4 billion this year.

This shows the enterprise industries’ decrease in technology products and equipment spending. Hardware producers CEOs also admit that they even if hardware sales pick up next year, it will still retain the companies in a struggling mode. This pushes the technology manufacturing giants to diversify their markets through complimentary company takeovers.

Xerox (NYSE:XRX) move to buy BPO company Affiliated Computer Services Inc. (NYSE:ACS) is not a surprise anymore given that this is the same strategy taken on by printer maker Hewlett-Packard Company (NYSE:HPQ) when it acquired EDS. The tech services division of HP contributes 38% of the entire company’s $9.5 billion operating profit for this year while its printing business contributes 33% and the pc division even less at 12%.

International Business Machines Corp. (NYSE:IBM) has also been one of the pioneers in changing the hardware manufacturing business. For 15 years, the technology giant has moved from hardware and machine production to information technology service business with its purchase of PricewaterhouseCooper LLP (PwC) in 2002 and the establishment of its IBM Global Services. To further strengthen the company’s investment in their services business, IBM announced that it intends to buy Bank of America Corp.’s (NYSE:BAC) Wilshire Credit Corp., which provides BPO services to financial institutions in the mortgage sector.

What will be interesting to see is a debunking of this ongoing industry strategy wherein technology manufacturing giants buy out service companies to expand and diversify their markets as the demand for their main products have continually dwindled. This trend is expected given that these tech leaders have purchasing power advantage. A non-conformist analyst, Bob Evans of Information Week, have challenged Accenture Plc (NYSE:ACN) to be the first one to make that change as he believes that Accenture has the power reverse this current trend.

Disclosure: No positions.

By John V.

3 out of 4 executives say that outsourcing is needed to get through this tough economic time.

By Kim G.

Offshoring helped firms stay afloat during the economic downturn by keeping costs within reach until such time the markets improve. Now that the world economy shows signs of recovery, the BPO industry should fear not on losing clients. As clients see them, now more than ever, as a partner.

By Kim G.

India has long been the dominant country when it comes to Business Process Outsourcing (BPO), however, times have changed.  The National Outsourcing Association (NOA) published a report titled “Best Practice Outsourcing and Offshoring” which pointed the issue Indian offshore providers face –increasing operational costs forcing some providers to relocate their centers to cheaper areas in India in order to compete more effectively, although this move has not hindered a recent surge in emerging outsourcing destinations. “Despite recent optimistic predictions from the NASSCOM conference, India is experiencing the effects of a global slowdown and a reduction in IT spending.  Costs for Indian vendors are also on the up.” –NOA report. Indian BPO providers may not be the only ones experiencing increasing operational costs, other offshore providers experience this as well but at a lesser extent as countries such as the Philippines receive strong government support.

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