Survey says IT outsourcing not out of woods yet

Even as major Indian outsourcing firms celebrated the return of growth to their market, a survey has found indications that the expansion of global outsourcing may have slackened after the initial spike in the first quarter.

According to the quarterly survey of the outsourcing industry by Everest Research, the value of new IT outsourcing contracts returned to their normal pace in June quarter, after jumping in the previous quarter. Total value of new IT outsourcing deals in June quarter fell to $1.5 billion from around $2.8 billion in the March quarter.

The signing of new deals in a quarter are seen as an early indicator of revenue growth in the following quarters. For example, the March quarter saw one of the highest rates of new contract addition, followed by a healthy performance by the IT industry in June quarter.

The survey found that, based on their yearly revenues, the value of pure IT contracts fell by 46% in the June quarter compared to the March quarter. Even when compared to the second quarter of 2009 when the World was in the grips of a recession, the value of IT deals fell by around 25%, dipping to $1.52 billion during the last quarter.

The June quarter performance of the global IT outsourcing business — in which India has a 60-65% share — was in line with the lack-lustre additions seen during the last several quarters. Against $2 billion or more of new IT outsourcing per quarter before the recession, the value of contracts had dipped to just $1.3 billion in the December quarter.

In contrast, BPO the outsourcing of processes like marketing, pay-roll and human resource management continued to show consistent growth. While the value of new IT contracts declined in June quarter from two years ago, new BPO contracts have nearly trebled in value during the same period, going from $364 million in second quarter 2008 to $970 during the last quarter.

“IT outsourcing is more dependent on discretionary spending by companies.. for example, to expand their operations.. But BPO tends to be more basic,” pointed out Amneet Singh, vice president at Everest Group. He pointed out that the growth in BPO outsourcing can be linked directly to the needs of companies to cut costs during the economic turmoil of the last two years.

“If you want to show an immediate reduction in costs, in two quarters or so, it is easier to do it by outsourcing business processes,” he pointed out. However, unlike in IT outsourcing, India has a share of just around 35-40%.

The June quarter saw the third straight decline in the size of new outsourcing contracts in the overall outsourcing industry. From around $4 billion of new IT and BPO contracts in the December quarter, the overall value of new contracts declined to $3 billion in April-June.

Europe accounted for a large part of the decline in originating overall outsourcing deals, with new European deals, including IT and BPO, falling by 41% in value during June quarter this year compared to the same period last year. Infosys, TCS and Wipro were among the top 8 outsourcing firms by number of deals signed during last quarter.

Against 19 new IT and BPO outsourcing deals signed by IBM, 16 by CSC and 15 by Accenture; TCS led the Indian pack with 15 new deals. It was followed by Infosys with 13 and Wipro with 12 new deals each.

Source: DNA

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