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Offshoring under threat?

September 26th, 2008

MUMBAI: A top-ranked US analyst has said the events that shook Wall Street last week spell the end of the golden age of offshoring for India.

Days after Wall Steet’s collapse, vice-president and principal analyst with US research firm Forrester, John McCarthy, said the scale of the crisis had rendered all previous studies including Forrester’s own survey, released earlier this month, redundant, and that Indian IT providers should prepare for slower growth and lower profits.

“It is naive to say an economic slowdown is good because cost-cutting will lead to higher offshoring. This is no longer a recession, it is fundamental a re-structuring of financial services that is taking place,” he told ET from Boston, Massachusetts. Many analysts, including research firm, Gartner, had said there could be higher opportunities for Indian companies and for offshoring.

However, McCarthy said there was already an impression that the financial services sector was over-staffed. Mergers and acquisitions and the conversion of large investment banks into commercial banks meant there would be fewer employees, fewer vendors and less extravagant IT budgets.

These developments, McCarthy said, would have a huge impact. Growth from financial services, the most aggressive buyers of technology, he predicted, would ‘go back to 25 per cent and stay that way’. To put this in perspective, IT bellweather Infosys Technologies had shown a 50 per cent growth in revenues from financial services clients in FY07.

What makes Indian IT vendors more vulnerable is their significant exposure to financial services clients –almost double that of their global peers as a percentage of revenue, according to McCarthy.

“There is no denying it will particularly impact Indian companies. In a way, they are paying the price for having under-invested in marketing all these years. Margins will continue to drift down to 15 per cent and there will be real pressure on the topline,” he said.

Also, the big difference between the last slowdown and the current one is that offshore presence of global vendors like IBM and Accenture has swelled from around 2,000-3,000 employees to 60,000-70,000.

The profit margins of Indian service providers, according to McCarthy, will move closer to that of their global peers, and barring one of two quarters of exceptional growth, Indian IT providers were unlikely to return to their historical growth rates.

Forrester’s own study, released just before the crisis came to a head, and based on an extensive survey across North America and Europe, had found 40 per cent of large businesses had slashed IT budgets, but a subset, 90 per cent of enterprises in media, entertainment and leisure, were not cutting back on IT spends.

While this holds some cheer for IT vendors, McCarthy said these sectors could not match the spends of financial services.
Source:Times of India

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