The Meltdown

The meltdown which has brought US economy to the brink of recession, has made
vulnerable the Indian outsourcing industry's biggest market-US. And of course,
financial services is the largest market among verticals. As the undercurrents
are being felt in Europe and the crisis percolates down to other sectors as
well, the question is imminent: Is this the end of the golden age of outsourcing
for India, as a Forrester analyst pointed out?

Views are abundant, but there is consensus on one big thing: that India
cannot remain unaffected. “We do see these incidents having a direct impact on
our industry, and those likely to create a downstream impact on other sectors of
US economy and worldwide markets,” says a statement issued by Nasscom.

More specifically, many of the financial institutions that have gone down
(bankrupt or acquired) have multiple vendors, including many tier-1 vendors,
servicing them. At the basic level the revenue from these customers will take a
direct hit. And further, as many more financial institutions shall come under
the axe, it will have a spiraling impact on revenue.

At a broader level, the Indian IT and BPO industry is bracing for a slower
growth as new projects will take a hit and there will be slowdown in IT spending
at least over the next few quarters. Earlier this year, Nasscom had moderated
the growth rate estimated for this year to 21-24percent factoring in the sub
prime crisis. However, factoring in the recent global meltdown, the growth rate
is likely to end up even lower, though Nasscom has not revised its growth
projection yet. According to Phaneesh Murthy, CEO, iGate, “Since financial
services account for 40 percent of India's technology and operations in the IT
export revenue, I anticipate slower growth in the next two years or so.”

The HR Crisis

Another area that will take a big hit is hiring, considering that manpower
is one of the biggest cost factors. Industry experts estimated a 25-30 percent
drop in hiring as companies get into a cost saving mode. According to Ganesh
Natarajan, Global CEO, Zensar Technologies, there will be a slowdown for three
to four quarters while the global financial sector corrects itself and the
impact on other sectors is addressed. According to Rishi Das, co-founder,
CareerNet Consulting, there is likely to be a 30-40 percent drop in hiring at
the Indian campuses this year, especially the IITs. “Even the IITs are feeling
the heat. In fact, they are likely to be more affected than the smaller
institutes as the companies may resort to hiring from smaller campuses for cost
savings,” he added.

Murthy confirmed that his company's hiring plans have slowed down and the
percentage of just-in-time or reactive hiring to the total hiring has increased.
NIIT Technologies too has confirmed cautiousness in terms of hiring. The company
has stopped hiring to the bench resorting to only 'just-in-time' hiring.

All this could result in a lowering of IT industry growth by six to seven
percentage points and a lowering of new job creation to about 200,000 in the
current year. According to Thakker, most vendors will continue to focus on
optimizing their resourcing and staffing to minimize bench time and maximize
utilization.

Business Impact

In some ways, the Indian IT and BPO industry is at the same stage today as
the slowdown in 2001-2003. Though, in others it could be much worse this time.
For one, this has hit the Indian IT and BPO industry close on the heels of the
rupee appreciation crisis. This was at the time when the industry was just
reeling out of the rupee appreciation crisis and had not fully recovered yet.
The slowdown, therefore, adds cumulatively to it. Further, US sub-prime crisis,
spiraling into a credit crisis has shaken up the very foundations of the
financial industry, and is already being termed as the worst financial crisis
since the 'Great Depression' of the 1930s. In a scenario like this it takes some
time before the fundamentals are back in place.

Notwithstanding the fact that cut in IT budgets would also mean more
outsourcing at some stage, Indian outsourcing has definitely taken a hit. India
being the largest, vis-à-vis the other outsourcing destinations, also means that
it is going to be the most impacted. Within that it's the companies with bigger
exposure to the BFSI sector and the US market that have already started feeling
the heat.

According to Nasscom, the BFSI sector accounts for 30-40 percent of the work
happening in the Indian IT-BPO industry. This indicates a high exposure to the
sector. For many tier-1 companies, including some of the top 10 software and
services companies, on an average 30-40 percent of revenue is contributed by
financial services.

The Specifics

In order to gauge the impact of what is soon turning out to be a global
financial crisis, as a starting point it will be apt to understand the specific
vendors that have been impacted with the axe falling on their customers.

Since financial services account for 40% of India's IT export revenue, I anticipate slower growth in the next two years or so Phaneesh Murthy CEO, iGate	Many US companies are not just outsourcing to Indian SP but also to global service providers who are catering to them through their delivery centers in India Milan Sheth Partner, Advisory Services, Ernst & Young

“The meltdown has meant that some of the larger clients that were being
serviced by various offshore players have actually either been acquired or have
gone bankrupt, and as a result their business is in doubt,” said Keshav Murugesh
of Syntel. Since these were large players like Bear Stearns, Lehman, Washington
Mutual, Wachovia, Fortis, etc it has brought in a lot of uncertainty to players
exposed to them. According to GB Prabhat, Founder CEO, Anantara Solutions, the
disappearance of prominent US firms implies the disappearance of an equivalent
volume of business.

The Broader Picture

The crisis though isn't going to be restricted to the vendors exposed to
these companies alone. The heat will be felt across the industry as the crisis
leads to an overall slowdown in IT spends. Overall, the market will don a more
conservative approach toward any spending, including IT spending, as the
companies want to wait and watch what's going to happen to the business. “When
the whole industry is in turmoil, companies become cautious and step back to
think how and where to spend,” explained Arvind Thakur, CEO, NIIT Technologies.

Preliminary analysis of the current scenario indicates an impact on
discretionary spend on IT due to the uncertainty and customer decisions being
postponed. According to Sumeet Salwan, director, Advisory Services of NeoIT, “In
the short-term the vendors will continue to get the same growth rate. While
non-discretionary spend is not going to get much impacted, the discretionary
spend (on new technologies and integration of new technologies) is going to be
limited. Non-discretionary IT spend will typically include existing work, live
projects and maintenance kind of work.”

This will have a broader impact on the dynamics of the horizontal service
offerings. Though application development and maintenance and support kind of
work will continue, it is the areas of new technologies and migration
technologies that will take a hit as companies get more risk averse. “There will
definitely be some impact on the way organizations look at their IT budgets.

Though new initiatives may be stalled, basic IT services such as support
functions will continue to be outsourced due to the cost advantages,” concurred
Anil Kumar, CEO and co-founder, Quinnox. According to Natarajan, consulting and
SI may be a little slow in the short term.

According to Viral Thakker, partner, practice lead, India, sourcing advisory,
KPMG, apart from spending curbs at large clients for discretionary projects
there will also be uncertainty caused by potential closure of captive units due
to their parents' bankruptcy/merger.

Some broader trends that are going to be in play, which the Indian IT and BPO
companies will need to brace up for over the next few quarters, include impact
on the additional work flowing in. As a result, companies will be cautious in
giving out additional work. Also, due to high volatility in the short term,
Murthy anticipates slower decision-making: “In the short term, there sometimes
tend to be delays in clients making the call, level of due-diligence wil go up,
number of approvals needed go up, etc. All this tends to stretch the sales cycle
but the deals are still happening,” explains Eddie Chandhok, President-Global
Delivery Organization, Infogain. Among the short-term challenges will include
slowdown in the availability of funding.

According to Prashant Bhatt, CFO, Fractal Analytics, after all these
historical events 'Lack of faith' amongst the lenders and investors will haunt
the segment at-least in the short to medium term.

Long-term Play

In the longer term, due to consolidation in the financial services sector,
Murthy expects there to be rationalization in total spend on technology and
operations. Federal Reserve's bail-out plan may seem like a good option to ride
over smoothly in the short-term, but the nationalization of the big financial
institutions may also put some curb on outsourcing in the long term.

However, overall, the sentiment is upbeat about the India value proposition
being strong enough to override the storm in the long term. “We are at the same
stage today as the slowdown (dotcom bust) was in 2001-2003. That was followed by
four to five good years, as people realized that Indian IT could give quality
service. Similarly, the next couple of years will be watershed years for the
industry where more companies will look for outsourcing which will augur well
with India,” explained Suresh Sundaram, VP- Corporate Marketing, HCL
Technologies.

Also, companies are foreseeing opportunities with respect to more outsourcing
work coming to India owing to the greater focus on cost cutting. They are also
eyeing increased opportunity in terms of integra-tion work, with takeovers being
the flavor of the day. However, companies will need to be cautious as ultimately
takeovers and mergers will mean one company outsourcing instead of two.

The Others

According to Kumar, the ripple effect of the financial sector turbulence has
just started spilling to other industries like retail, consumer goods, etc. The
widespread credit crunch and high rate of infrastructure borrowings may see the
effects of the slowdown spill over to aviation, leisure, tourism, hospitality,
and other such industries. According to Thakur of NIIT Technologies, in a
situation of tight credit there will be impact on other sectors of the economy.
“It will be a matter of time before the other worldwide markets get affected,”
he adds.

Murthy pointed out that any industry which avails credit facilities including
real estate, high-end consumer goods, etc, will be impacted over the next year
or so.

Geographically, the impact is gradually percolating to the European market as
well. One is already seeing consolidation activity becoming rampant among the
European financial institutions. “US impact is already percolating to Europe.
This slowdown will certainly hurt the India plans of the leading companies,”
said Thakker.

Shipra Malhotra

shipram@cybermedia.co.in

Courtsey: Dataquest