Canada outsourcing row may hit Indian IT
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Bangalore: Tata Consultancy Services Ltd , Infosys Ltd and iGate Corp. , which are facing a political backlash in Canada on concerns that jobs are being shipped overseas, may have to wait till at least the middle of 2014 before top banks and financial services firms in the north American nation decide on farming out work to Indian software services providers, experts say.
Canada’s top five banks— Royal Bank of Canada (RBC), Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal and the Canadian Imperial Bank of Commerce—and other financial services firms are under pressure to create more jobs in the country amid rising unemployment rates, according to people familiar with the development.
“Offshoring is a politically sensitive and not popular issue in Canada right now. In the minds of the voters, elimination of a job through cost cuts is different from offshoring a job to a third-party location, like India or Philippines,” said Ben Trowbridge, chief executive of Dallas, Texas-based outsourcing advisory firm Alsbridge Inc. “If the unemployment rate comes down, then it might become less of a political issue to outsource more.”
The current freeze in offshoring in Canada’s banking and financial services (BFS) sector could continue well into next year, at least till the middle of next year, said people familiar with the development and other experts. Existing outsourcing contracts, however, will continue to function normally, they said.
Canada’s banks and financial services firms outsource software and services contracts worth $10 billion (around Rs.60,000 crore) a year, according to experts tracking the sector.
The current backlash against outsourcing was to a large extent triggered by the controversy surrounding an iGate-RBC contract. In April, the Canadian government began a probe into a report that said RBC, the country’s largest bank, was using temporary foreign workers from iGate to replace permanent employees.
RBC also reportedly faced protests from its own customers who threatened to close their accounts at the bank if it continued to outsource more work to India.
The Canadian bank said it will make every effort to use local firms instead of foreign ones.
“RBC will make every effort to source in Canada in accordance with the principles set out in our Supplier Code of Conduct,” an RBC spokeswoman said in an email response. “We are always looking at ways to improve efficiency and better serve clients across all our operations. This includes automating and streamlining processes.”
Bank of Nova Scotia said its Canadian workforce has, in fact, grown 13% in the past five years.
“While Scotiabank strives to continually achieve efficiencies with our processes, it is not and has not been our practice to displace regular employees with temporary foreign workers,” said a spokeswoman at Bank of Nova Scotia, also commonly referred to as Scotiabank. “We continue to grow in Canada and abroad and this creates high-quality jobs here at home.”
“Like most companies, we currently contract out some IT services to augment project work. Scotiabank uses IT suppliers for staff augmentation to respond to demands for capacity and driven by on-going business needs,” she added.
Canada’s unemployment rate stood at 7.1% in August. According to a Bloomberg survey, Canada’s jobless rate will be higher than the US in 2014, with employment growth rates in Canada expected to be the slowest this year in more than a decade.
“The trouble continues there—the iGate-RBC episode has had a bigger impact than anticipated. It’s caused a chilling effect on the offshoring agenda, particularly for the big banks,” said Peter Bendor-Samuel, founder and chief executive of consulting and research firm Everest Group. “It’s slowed down a very attractive market. Top banks are much more circumspective about offshoring now.”
For offshore IT firms such as iGate Corp., which gets about 30% of its business from BFS clients in the region, the development could raise concerns about pipeline of near-term business from the region.
Even local Canadian IT firms such as CGI Group Inc. are feeling the effects of banking clients deferring spending plans. “Revenue in our Canada segment for Q3 2013 was $429.8 million, a decrease of 1.7% compared to Q3 2012. The revenue change was due to lower Si&C (systems integration and consulting) work volumes due to the completion of projects, and a cautionary spending pattern deferring the start-up of new projects,” CGI said in its third quarter report.
“RBC is big enough to have internal economies of scale but mid-sized, regional banks in places like Canada are in a particularly difficult position. On the one hand they don’t have the huge economies of scale that tier 1 banks can achieve internally, nor are they always well positioned to sell services to other, smaller banks or corporations (insourcing),” said Peter Redshaw, managing vice-president at research firm Gartner. “They are caught in the middle with relatively complex processes, a wide range of products, ageing systems and without big economies of scale.”
After the September quarter results, iGate chief executive Ashok Vemuri did not comment directly on demand from Canada, but said the firm’s overall demand pipeline looked healthy, when asked about outsourcing from Canadian clients.
Canada’s other top banks Toronto Dominion, Bank of Montreal and Canadian Imperial Bank of Commerce did not respond to email questionnaires seeking comment. Infosys, TCS declined to comment to a detailed email questionnaire.