On the face of it, Indian software services firms, their financials uniformly hurt by the appreciating rupee, have reason to cheer: European companies, traditionally slow adopters of outsourcing, are begining to move faster, and in the six months to June, the volume of work outsourced by them has risen 80%. This work is usually billed in euros. If India’s software firms and call centre companies are not celebrating, it’s because a very small portion of work outsourced by European businesses was won by Indian vendors such as Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd. Not a single recent mega outsourcing contract, each valued over $500 million or Rs2,015 crore, was won by an Indian company.
AstraZeneca Plc. earlier this month awarded International Business Machines Corp. or IBM, the world’s biggest tech services firm, its information technology infrastructure management business in a $1.4 billion seven-year contract, despite the Indians doggedly chasing the deal. IT infrastructure management, which involves taking over the client’s tech assets including computers, servers, data banks, communication gear and, in some instances, even staff, is seen as a risky exercise given the difficulties in forecasting customer needs, hardware prices and other costs in a multi-year scenario.
The London-headed drug maker was not the first one to do so. In the past four months, European customers such as UK-based Royal and Sun Alliance, Switzerland’s Banque Cantonale Vaudoise and Resolution Insurance of Britain have awarded mega deals worth nearly $5 billion to IBM and smaller rival Electronic Data Systems Corp. (EDS).
Given the spurt of outsourcing in Europe and nature of such contracts, that is a huge missed opportunity. Europe has witnessed almost 78% growth in outsourcing contracts in the first half of 2007, according to data from offshore advisory firm Technology Partners International or TPI, with the region accounting for well over half the new outsourcing contracts awarded so far in the year, against 32% last year.
Of the $10.7 billion in mega deals awarded globally this year, over two-thirds (68%) have been in Europe, “which compares with an average of 39% over the last five years and gives Europe its greatest-ever share of this top end of the outsourcing market,” TPI said in a report earlier this month. The top five European IT companies such as Atos Origin, British Telecom, Capgemini, Siemens and T-Systems, have won 27% of mega deals, compared with just 16% over the last five years, “reflecting Europe’s increasing importance at the top end of the global outsourcing market,” said TPI.
Analysts blame the patchy presence of the Indian tech firms in Europe for their losses in the continent. “Indian companies are unwilling to invest in building a local presence in Europe beyond UK,” said Sid A. Pai, partner and managing director of TPI’s India arm. While these firms are hiring locals for client-facing activities in Europe, “what they need is to build real delivery capabilities if they want to be seen as serious contenders for mega deals,” added Pai, who advised banking powerhouse ABN Amro when it outsourced work to IBM, Accenture and a clutch of Indian firms late in 2005.
The AstraZeneca contract awarded to IBM, for instance, involved supporting the pharmaceuticals major’s operations across 60 locations, “and unless a vendor has that kind of global presence, it will be difficult to bag such deals,” said a senior executive from a top Indian IT company, who did not wish to be identified.
Laws in Europe, designed to protect worker interests, such as the three-decade-old European ‘Acquired Rights Directive’ that mandates firms outsourcing work to compensate their workers for any job losses, don’t help. “An outsourcer normally wants this cost to be borne by a vendor, which many Indian companies are not ready to share because that may affect their margins,” Pai added.
Also, Indian firms are not comfortable with contracts that require them to take on the responsibility to own and manage their IT hardware and staff. Such clauses aim to pass on to the vendor the risk and complexity of managing day-to-day tech operations of the outsourcer in a multi-year term, “and that is where Indian companies have been facing the challenge,” said Srinivas B.G., senior vice-president, Europe, West Asia and Africa for India’s second largest software firm, Infosys, explaining the hesitation among firms here to make the leap of faith into big businesses.
In contrast, IBM revels in such deals. The Armonk, New York firm, which derived around $24 billion in 2006 from infrastructure management services, “takes over IT assets of customer organizations as part of the deal, helping customers part with the risk of managing complex projects,” Peter Lorenzen, vice-president of IBM’s India delivery centre, had told Mint in a June interview.
Result: Indian companies have been getting only small pickings in large outsourced tech deals. In the late-2005 ABN Amro contract, the Dutch financial powerhouse farmed out $400 million worth of application development work to TCS, Infosys and Patni Computers Systems Ltd, while IBM walked away with $1.8 billion infrastructure management piece of the deal. In mega deals, said Sabyasachi S. Satyaprasad, senior director at neoIT, a Bangalore-based offshore advisory firm, “Indian companies have not yet arrived”.
So, will Indian companies always remain shy of taking over IT assets of customer organization? Small steps are being taken to adjust to the big league. “We are now ready to take over people—in fact, around six months ago, we transferred some people from ABN Amro’s IT department as part of a new deal,” said Infosys’ Srinivas, of his firm’s first such foray. Bigger rival TCS that took over the assets and running of UK firm Pearl Insurance’s 1,000-people IT operation late in 2005, has followed it up with other small deals in Britain and South America, said TCS’s chief financial officer S. Mahalingam.