Credit crisis to boost IT Consultants?

Date: 29-04-2008
Source: Business Line

Multinational IT consultancy companies such as IBM, Accenture, Capgemini, Logica and CGI Group expect the credit crisis in the US to help them grow their business faster as banks and finance companies invest in technology and outsource more business to improve their reporting and risk management systems, and reduce costs, respectively.

Indian IT firms such as Infosys Technologies, Wipro, and Tata Consultancy Services can also expect to gain from this phenomenon, but analysts and experts say such firms have been more conservative in their estimates of growth.

“In contrast, some of the global vendors have tended to be more forthright and bullish about the same market reality and the same market opportunities,” said David Mitchell, senior vice-president of IT research firm Ovum.

Indian firms expect their business in the year ahead - most of them follow an April to March accounting period—to grow, but add that much of this growth will come in the second half of the year. Some of the companies have had projects cancelled or postponed by customers hit by the credit crisis in the US, which accounts for around two-thirds of the business of Indian software firms.

The multinational firms, meanwhile, see gains even in the short term. Several are adding people at low-cost locations such as India. And, most have done well in the quarter ended March.

IBM reported a 14% growth in revenues from the financial services industry in the quarter to March at $6.9 billion (Rs27,738 crore), ahead of company's overall 11% growth in revenues to $24.5 billion. Business in the US, which accounts for one-third of IBM's revenues, grew 6% in March quarter, as against 2% in the previous quarter.

“Clients are focused on faster payback driven by proven value proposition, and there's no shortage of opportunities for deals that fit those characteristics,” Mark Loughridge, CFO and senior vice-president of IBM, said in an analyst call on 16 April after the firm reported its quarterly earnings.

Accenture chief executive William Green struck a similar note during his recent visit to India, when he said he expected the slowdown in the US to accelerate outsourcing and that the company would increase its headcount in India by one-third to 50,000. Across the world, Accenture will add 60,000 jobs this year, the same as it did in 2007.

“Clients will look at alternative options such as outsourcing to keep costs under control in a slowdown,” Green added.

He said Accenture, which has forecast that its revenues will grow by 9-12% in 2008, has not seen any of its projects being cancelled or delayed by customers.

“Outsourcing continues to increase due to the slowdown and global vendors are being preferred over Indian vendors because of their end-to-end capabilities and clients' aversion to taking on integration issues,” said Avinash Vashistha, chief executive of Tholons Inc., an outsourcing advisory firm. He added that Indian vendors have relatively higher exposure to discretionary projects that are more likely to be scrapped during a slowdown.

The Toronto-headquartered CGI, which earns one-third of its $3.7 billion revenues from BFSI (banking, financial services and insurance) segment, said it was not affected by the economic troubles in the US.

“We see many upsides to the current scenario in the US,” said Donna S. Morea, president, US operations and India, at CGI. “As the economy softens, there's intense pressure on our clients to retain their own clients, save costs and deliver quality services.”

CGI, whose shares are traded on NYSE and Toronto Stock Exchange, serves 40 of the top 50 banks in the US, including Bank of America Corp. and Citigroup Inc.

“We actually see the demand for outsourcing a bit counter-cyclical,” said Morea. CGI has seen some projects being delayed, but said the overall increase in outsourcing has offset this. The company expects orders of $12 billion in the year to December.

To cater to the rising demand, CGI plans to scale up its delivery team in India by growing its numbers to more than 5,000 in the next two years, up from a little less than 2,000 now. CGI, which offers services such as application development, maintenance and software engineering, plans to start offering back-end services such as claims processing for the insurance sector in the year ahead.

The nature of the slowdown is not uniform across all finance businesses, said Ovum's Mitchell. “While we are seeing great nervousness in organizations that operate in the capital markets arena, we're not seeing the same level of slowdown within the insurance markets,” he added.

According to IT research firm Gartner Inc., the current US slowdown will accelerate offshoring of IT services and clients will consider having an increasing portion of their labour in offshore, lower cost locations such as India. Gartner analyst T.J. Singh said India would remain the dominant location for IT offshore services for North American and European customers.