The last quarter saw Europe lagging the US in recovery from the recession.

This quarter, however, it seems to be catching up with companies and analysts indicating a pick-up in spending and offshoring in the region.

S Janakiraman, president and group CEO, product engineering services, MindTree Ltd, says his company’s growth “momentum” in Europe in the current quarter was much higher than last year. “I would say the momentum this year is much higher compared to the same period last year (in Europe). Spending has not gone up but what is being observed is that offshoring is making more sense to them now as they are emerging from slowdown and remodelling their business.”

Traditionally, Europe has gone for lesser offshoring than the US.
Vipin Khare and Gaurav Rateria, Morgan Stanley analysts, in a March 5 note to clients after meeting Infosys Technologies management wrote, “The management believes that in Europe growth in technology spending by clients could range from flattish at the lower end to as much as 5-7% at the higher end.”

Subhash Dhar, head of sales, marketing and communications at Infosys, is cautious in giving his outlook for Europe: “We are not seeing any direct impact on our business with clients in Europe. However, the businesses in Europe are slow-moving in terms of spending as compared to those in the US.”

Some say much of the growth in Europe could come at the cost of margin due to the stiff competition among the vendors and hard bargaining by clients.

Take the case of Tata Consultancy Services’ (TCS) recent win of the British government deal. Insiders in the know claim the largest Indian IT company clinched the contract at a very low price.

“TCS won the British government contract to build government pension scheme from Personal Accounts Delivery Authority (PADA) when all other bidders had left the bidding process due to uncompetitive pricing,” said the source. TCS’s PADA deal was reportedly priced at ?600 million for 10 years.

Khare and Rateria said TCS’ rival Infosys has been disciplined in vendor consolidation negotiation process by not competing on price but still going for premium pricing for a premium product.

However, Dhar said Infosys may not always stick to retaining its margin level. “Over the years, we have lost contracts as we stuck to a certain price level. At other times, prevailing business scenario made us climb down on pricing and margin. So, in essence we always look for an optimum mix of pricing that helps us maintain a certain margin level overall.”

MindTree’s Janakiraman said pricing in Europe, which has a very high cost structure, has always remained stable.

“Generally, due to higher cost structure, Europe offers better pricing too, as compared to the US. They benefit more from offshoring due to this (high cost structure),” he said.

According to him, after a price dip last year, new order were coming at rates comparable to 2007-08 levels, when they had reached the peaked.

“It (prices) is marginally negative but some new orders have been won at prices that are similar to prices prevalent two years back,” Janakiraman said.

Interestingly, France and Germany still remain difficult markets in Europe even as IT companies penetrated into the Nordic (Norway, Sweden, Finland and Denmark) and Benelux (Belgium, Netherlands and Luxemburg).

Janakiraman said for MindTree, Germany was no longer tough as the English language was now more widely used there. “In France, language is the biggest barrier,” he said.