Friday, August 24, 2007
Already struggling with a stronger rupee and rising wages, the fear for outsourcers is that the subprime woes will spread, although larger players such as Infosys Technologies say this could open up new opportunities.
"The key issue here is the number of challenges being faced at the same time," said Atul Vashistha, chief executive of U.S.-based outsourcing consultancy firm neoIT.
"The question is how do they handle the exposure to a slowdown in the financial sector as the subprime woes spread to their other financial businesses." Bangalore-based iGate Global Solutions Ltd (IGAT.BO: Quote, Profile, Research), a mid-sized outsourcer, has seen its income from U.S mortgage companies drop to 7 percent of its revenue in the June quarter from more than 10 percent in the December quarter.
"This has come like a second wave. It started in February-March and after that it kind of died down. Now it has picked up, which is of course a little concerning," iGate chief Phaneesh Murthy told Reuters.
iGate's clients include GreenPoint Mortgage Inc, a unit of Capital One Financial Corp which said on Monday it would shut the wholesale mortgage unit due to the downturn.
Last week, India-based outsourcing company WNS (Holdings) Ltd lowered its fiscal 2008 outlook as work stopped coming from U.S. mortgage lender First Magnus Financial Corp, which closed funding home loans and taking mortgage loan applications.
Currently the problems were confined to a small sector and there were no signs of a broader slowdown in the financial sector's technology spending, said iGate's Murthy, whose company offers services such as loan processing and helpdesk facilities. "However, as a general philosophy what has happened in the past is that when subprime goes, prime tends to follow with a few months lag. That's a concern because if the prime follows then it's a problem," he said.
The back-office firms have thrived providing western firms with services such as insurance claims processing, payroll management and answering customer queries. Driving the boom is a large, skilled -- and cheap -- English-speaking workforce.
In the year to March, back-office services exports grew by a third to $8.4 billion and they are projected to rise to $11 billion in the current financial year, according to the National Association of Software and Service Companies.
UBS Investment Research said in a report that if weakness in the U.S. mortgage sector spread through the financial services sector and led to a U.S. recession, then discretionary spending on services provided by companies such as Infosys would be hit.
However, Infosys BPO, the company's outsourcing unit, saw opportunity where others saw a threat. "We are not too concerned about this subprime mortgage impacting our processes," said Amitabh Chaudhry, chief executive of Infosys BPO.
Chaudhry said the key factor that drove the outsourcing boom -- a need to cut costs -- would be even more prevalent in any economic downturn. "I'm not saying that should happen, but if it does happen then I think it's not a negative, it's positive."
Fifty percentage of India's gross domestic product linked to services such as Offshore Software Outsourcing, retail and banking, developed countries are keen to tap the now limited sectors. By taking advantage of this India is pushing its comparative advantage in offering low-cost services by making concessions on agriculture to get more access for its technical workers abroad.
In the last WTO round of talks held in Qatar in 2001 have floundered, with developing countries including India arguing that government support to European and US farmers artificially depresses prices, effectively forcing their produce out of export markets. Almost two-thirds of India's workforce is linked to agriculture. “Politically, it's not so easy to push for a deal on services unless there is a breakthrough on agriculture though most people would agree that India would benefit from opening the services sector in field like Offshore Software Outsourcing Development.”
As far as concerned to competition for Indian Software Outsourcing Industry the China is next to it by offering the same services. Chinese software Outsourcing companies are looking to speed up their development in a bid to grab a larger slice of the global IT market and to fend off threats from their Indian counterparts.
In whatever way, jobs will move out at a higher pace than what we think. According to consultancy firm Research, 3.4 million US service-sector jobs are expected to have moved overseas by 2015. Observers say one-ninth of the world's service jobs could be done from any location. So it would be great opportunity for country like India to provide their services world-wide. India has repeatedly urged Western nations to make a commitment not to enact legislation that prohibits the off shoring of call centers and Software Outsourcing Development.
The classic reasons for Offshore Software Outsourcing is to provide services like reduced costs, improve quality, save management time and to effect transformations. Because a customer wants these, India provides these kinds of services better than anybody in world.
Wednesday, August 22, 2007
India must make a huge push in education and infrastructure to ensure it is not overtaken by China as a global outsourcing destination, a top industry body warned on Tuesday.
China is unlikely to surpass India "in any significant manner over the next three to five years," said Kiran Karnik, president of the National Association of Software and Services Companies, or Nasscom.
"When I look in the rear view mirror, I don't see anyone there yet but I know they are out there and that they can move very fast... China must not be ignored," Karnik told reporters in New Delhi.
China, the only other country with a population of over one billion people, has come a long way in establishing itself as a destination for information technology sourcing with government and industry working towards increasing the talent pool and improving the regulatory environment, Karnik said.
"While India continues to be the most favoured destination by far" for global business process outsourcing, "we need to ensure we maintain this position in the years to come," he said.
"This will require a favourable policy and tax environment, a huge thrust in education and human resources and vastly better infrastructure," Karnik said.
The Asian Development Bank last month noted that education in India was lagging seriously behind its rapid economic growth with only 12,000 training and vocational institutes, compared to half a million in China.
India, which has the largest pool of English-speaking graduates outside the United States, who are willing to work for salaries far less than those paid in the West, has become a world leader in IT outsourcing as Western firms have sought to cut costs by moving many of their operations overseas.
Outsourcing has been vital in helping drive India's economic boom.
India's IT software and services revenues totalled 30.2 billion US dollars in 2006, up from 5.8 billion US dollars in 2000, with growth being driven by exports.
China trails far behind with IT software and services revenues totalling 12.2 billion US dollars in 2006, but that is up from just 2.4 billion in 2000, Nasscom said, with growth still driven by its domestic market.
"We know China is moving ahead very rapidly" thanks to its "systematic and planned approach to rapidly developing key sectors of its economy," its substantial domestic market and sizeable educated workforce, Karnik said.
"They are learning English at breakneck speed," he added.
The government in Beijing is extremely keen on promoting information technology and business process outsourcing, Nasscom added in a report on China's IT software and services industry.
Leading Chinese firms have reported average growth rates of 40 to 50 percent over the past few years and are beginning to receive a steady stream of business enquiries from Western customers, the report said.
India's outsourcing success has brought growing competition not only from China but from other nations including South Africa, Vietnam, South Korea and Mexico.
Karnik said the two Asian giants could learn from the experiences of the other, with infrastructure development strong in China and standardisation of quality a key asset in India.
Even if China catches up significantly, Karnik said he believed it would not hurt India in a major way.
"The global outsourcing phenomenon will only grow. There's going to be so much demand the only constraints will be supply-side constraints, not market share constraints," he predicted.
China's educated workforce is growing rapidly and its government is supporting the growth of the outsourcing sector by providing incentives and fiscal support, says the National Association of Software and Service Companies (Nasscom).
But it is unlikely to catch India's lead in global outsourcing operations for the next 3-5 years as currently the IT software and services sector accounts for a just 0.5 percent of the country's gross domestic product, it said.
"India continues to remain the most favored destination by far for information technology (IT) and IT-enabled outsourcing. But we need to ensure that we maintain this position in the years to come," said Nasscom president Kiran Karnik.
"This will require a favorable policy and tax environment, a huge thrust in education and human resources and vastly better infrastructure," Karnik told a press conference here while releasing the report on China's IT industry.
Beijing, in its aggressive effort to boost the industry, has initiated as much as 10 million programmes with which it is aiming to promote 11 cities as key bases for undertaking offshore services.
The Chinese government, under its ministry of commerce, has also created a specific fund for providing specialized training to some 400,000 university students over the next five years, the report said.
"Each month we host delegations from China which seek to learn from India. India too must learn from China's experiences," Karnik said.
"China's systematic and planned approach to rapidly developing sectors and its strong focus on education and infrastructure offer key learnings that may be usefully adapted to the Indian context."
The Chinese software and services revenues have grown from $2.4 billion in 2000 to $12.3 billion in 2006, an increase of 31 percent. The industry is expected to grow to $28 billion within the next three years.
Tuesday, August 21, 2007
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The proposed contracts, outlined in a recent early notice of the DIA's plans, reflect a continuing expansion of the Defense Department's intelligence-related work and fit a well-established pattern of Bush administration transfers of government work to private contractors.
Since 2000, the value of federal contracts signed by all agencies each year has more than doubled to reach $412 billion, with the largest growth at the Defense Department, according to a congressional tally in June. Outsourcing particularly accelerated among intelligence agencies after the 2001 terrorist attacks caught many of them unprepared to meet new demands with their existing workforce.
The DIA did not specify exactly what it wants the contractors to do but said it is seeking teams to fulfill "operational and mission requirements" that include intelligence "Gathering and Collection, Analysis, Utilization, and Strategy and Support." It holds out the possibility that five or more contractors may be hired and promised more details on Aug. 27.
The DIA's action comes a few months after CIA Director Michael V. Hayden, acting under pressure from Congress, announced a program to cut the agency's hiring of outside contractors by at least 10 percent. The CIA's effort was partly provoked by managers' frustration that officials with security clearances were frequently resigning to earn higher pay with government contractors while performing the same work -- a phenomenon that led lawmakers to complain that intelligence contract work was wasting money.
"Mind-blowing," was the reaction of Rep. Jan Schakowsky (D-Ill.), a member of the House Permanent Select Committee on Intelligence, when she learned of the DIA proposal. In a telephone interview, she described it as "definitely something to be concerned about."
In its notice, published on a procurement Web site, the DIA said that "the total price of all work to be performed under the contract(s) will exceed $1 billion," adding that the tally "is only an estimate and there is no guarantee that any orders will be placed."
A DIA spokesman, Cmdr. Terrence Sutherland, said this week that "this is the first DIA contract of its type specifically intended for the procurement of intelligence analysis and related services." He said the primary purpose of the proposal is to ensure that adequate outside support is ready to assist the DIA, as well as Army, Navy, Marine and Air Force intelligence centers and the military's overseas command centers.
In May, Schakowsky and Rep. David E. Price (D-N.C.) sponsored an amendment to the 2008 intelligence bill that requires the Defense Department to compile a database of all its intelligence-related contracts. The aim, Schakowsky said, is to force a review "of what contractors are doing and, importantly, whether contractors are performing inherently governmental functions."
Some activities, she said, are so sensitive that "if and when they are done," it may not be appropriate for the government to "contract these activities out."
Price asked during the debate whether contractors should be involved in intelligence collection and analysis, interrogation, and covert operations, or whether those activities are so sensitive that "they should only be performed by highly trained intelligence community professionals."
In a statement Friday, Price questioned whether "a contract award of this scale is consistent with the DNI's commitment to reduce the alarming portion of the intelligence budget that goes to private contractors." (DNI refers to the director of national intelligence, Mike McConnell.)
The DIA is the country's major manager and producer of foreign military intelligence, with more than 11,000 military and civilian employees worldwide and a budget of nearly $1 billion. It has its own analysts from the various services as well as collectors of human intelligence in the Defense HUMINT Service. DIA also manages the Defense attaches stationed in embassies all over the world.
Unlike the CIA, the DIA outsources the major analytical products known as all-source intelligence reports, a senior intelligence official said, speaking on the condition of anonymity.
A former senior Pentagon intelligence official said yesterday that the DIA is struggling to do "the in-depth intelligence work required under present circumstances" and that is why it is preparing to contract for outside help. He cited the military's efforts in Iraq to provide human intelligence sources to forces that rotate out after tours of a single year. "That is hardly enough time to develop serious, dependable Iraqi sources," he said.
The former official added that for years intelligence has not been a prime career path for officers who seek to reach the top positions in the Army, which favors infantry, armor and special forces as the specializations that lead to promotions.
The war in Iraq has required the hiring of outside contractors by the Pentagon to perform not just security jobs but also the collection of intelligence used for force protection. Earlier this year, retired Marine Gen. Anthony C. Zinni, a former head of the U.S. Central Command who today advises defense contractors, said there is a legitimate role for private firms in security missions. But he warned that problems can arise "when they take on quasi-military roles," such as planning intelligence operations.
In its report in June on the fiscal 2008 intelligence authorization bill, the Senate Select Committee on Intelligence noted that Congress had allowed full-time positions in the intelligence community to grow 20 percent since Sept. 11. But personnel caps forced the agencies to turn to contractors.
The committee questioned the additional costs involved in using contractors, citing an estimate that a government civilian employee costs on average $126,500 a year, while the annual cost of a core contractor, including overhead and benefits, is $250,000.
Many companies that provide contract workers to the CIA and Pentagon intelligence agencies are headed by former employees of those agencies. For example, Abraxas, which is run by a former CIA case officer, has hired -- and then contracted out to the government -- more than 100 former intelligence employees over the past six years.
The CIA imposed a rule that former personnel cannot perform work with a CIA contractor in the 18 months after they leave the agency.
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