Mumbai: Britain’s ballooning deficit spells opportunity for Indian information technology (IT) companies as Prime Minister Gordon Brown’s government struggles to save money by outsourcing non-core activities and better managing existing IT infrastructure.

Sweet spot: IT industry body Nasscom estimates that Indian IT firms earned $50 billion in 2009, with a little more than 17% of that, or $8.5 billion, coming from the UK market. Madhu Kapparath / Mint

Both the government and the companies chasing business worth around £10 billion (around Rs76,800 crore) are, however, trying to make sure they avoid being tainted with the notion that local jobs are being sent overseas even as the embattled Brown, facing an election that’s due by June, tries to lead Britain into a recovery after the shambles of the global financial crisis. An Ipsos Mori poll showed, however, that Brown may be closing the gap with his main political rivals, The Guardian newspaper reported on its website on 25 November.

Trimming the deficit is a key task. Excluding financial sector interventions in the wake of the economic crisis, the UK’s net public sector debt was £681.1 billion (48.7% of GDP) at September-end, against £562.4 billion (39.2% of GDP) at the end of September 2008.

The fear of jobs being lost, a political hot potato this close to an election, is not easy to overcome, as the Cardiff Council found after awarding a $150 million (around Rs695 crore) contract recently to Tata Consultancy Services Ltd (TCS), India’s biggest software firm.

The “reports in the media are very disappointing and completely inaccurate as we have been very specific since this contract was signed that there will be no job transfers", the council said in a release on 4 November, reacting to local media stories that the contract would lead to job losses.

Industry observers consider TCS’ Cardiff win as a significant advance for the company as well as for Indian service providers in general.

“TCS has made the breakthrough in local government that it has long desired," said Ovum, a UK-based technology research house, in a report on the deal. “This is a major contract that could bring big dividends to TCS across the local government sector."

To avoid adding to the perception of job losses, the government is adopting a language that emphasizes “partnership" with technology firms to improve the delivery of government services to citizens.

The Cardiff Council statement declined to refer to the TCS contract as an “outsourcing deal", but said it “is very much a partnership to ensure staff both here and in TCS learn valuable new skills from each other".

TCS, which won the contract, has also been careful to use the language of partnership rather than sensitive terms such as offshoring or even outsourcing.

“We want this to be an outstanding example of innovative engagement between the public and private sector," said Brian Woodford, director (public sector) at TCS, about the Cardiff win.

The Indian IT services firms Mint contacted were reluctant to offer comments as they did not want to provoke any controversy around offshoring and job losses. The British media has regularly reported on alleged scams involving the theft and sale of identity of British citizens by IT firms based in India.

In mid-March, following an “undercover news investigation", British Broadcasting Corp. said its reporters were able to buy stolen credit card details from a broker in India. These belonged to British citizens who had made online purchases by giving credit card details to an India-based call centre.

As part of the effort to trim the deficit, a British government cost-cutting initiative called the operational efficiency programme (OEP) is targeting savings of nearly £35 billion in public spending by 2013. Between July 2008 and May, OEP undertook extensive evaluation of UK public sector spending and made recommendations to the treasury department.

Savings of around £7 billion a year are being targeted through restructuring IT and back-office operations by various government departments, including local government bodies. The savings can be achieved by “increased momentum for shared services and outsourcing", the OEP study recommended.

Analysts expect this wave of outsourcing to shift the balance in favour of India-based IT firms that will likely gain market share from UK-based companies such as Logica Plc, Liberata Ltd, Capita Group Plc and BT Group Plc, which currently dominate the UK public sector outsourcing market.

IT industry body Nasscom estimates that Indian IT firms earned $50 billion in 2009 with a little more than 17% of that, or $8.5 billion, coming from the UK market. However, only a negligible portion of the UK revenue comes from the government sector.

“Radical rethinking is happening," said Geoff Llewellyn, director (public sector) at Wipro Technologies, the IT services arm of India’s third largest software firm Wipro Ltd.

“A lot of discussions are happening, and there are big expectations (among Indian IT firms) around OEP, especially as there are explicitly stated intentions to outsource more," Llewellyn told Mint over phone from London.

Non-core back-office operations such as finance and human resources of various government departments are likely to see a higher degree of outsourcing.

A May OEP estimate puts overall annual UK public sector spend on IT and back-office operations at nearly £16 billion and £18 billion, respectively. Currently, only around £2-3 billion of services are being outsourced, leaving at least £15 billion of back-office operations that can be contracted out, the OEP report said in its recommendation to the UK treasury. Ovum estimates that in 2010, the UK public sector will outsource at least £10 billion of IT services.

India-based vendors, which currently get very little business from the UK government, are expected to gain market share as the new wave of outsourcing starts because of rising global recognition for cost-competitiveness and quality, according to Llewellyn.

So far, most outsourced IT work from the UK public sector has been near-shored, or given out to service providers headquartered in the UK or having a significant presence there, in an effort to prevent local jobs from leaving the UK. This near-shoring bias had thus far worked against Indian IT firms such as TCS, Infosys Technologies Ltd and Wipro.

“With the increased emphasis on cost-cutting, the UK government outsourcing is likely to shift from near-shoring to offshoring," said Kumar Parakala, head of global sourcing at audit and consultancy firm KPMG. The argument that such moves will lead to the loss of jobs is “a myth", he added.

The shifting trend is already visible with TCS signing the Cardiff Council contract. Besides this, TCS could win a large contract for administering the UK’s national pension scheme (the largest such in Europe), as it is one of the two bidders left in the fray.

Indian service providers are also realizing the significance of having a bigger presence in the UK to help allay fears of job losses.

“They are hitting the sweet spot with the right mix of on-site and offshore presence, and positioning themselves to capture the public sector demand," Ovum analyst John O’Brien told Mint over phone from London. “We are expecting a level playing field for the India service providers as we go forward."

India’s second largest IT services exporter Infosys did not offer comments for this story as it is “not active in this space" (in the UK).