Friday, August 24, 2007

Indian outsourcers start to feel subprime fallout

Ripples from the U.S. subprime mortgage crisis have reached India's back-office outsourcing sector, where mostly smaller firms are feeling the pinch as U.S. companies cut back or stop some spending on services.

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."

Offshore Software Outsourcing Services Push by India

Offshore Software Outsourcing Development is sector, in which India willing to take action allowing rich nations greater access by offering them good valuable services. These Indian companies, with their advanced expertise and huge development teams, are formidable competitors for domestic firms, which usually have only hundreds of people on staff. By means of that, these firms are providing valuable services to their global clients to survive in International market of Offshore Software Outsourcing. India is biggest market for Offshore Software Outsourcing services, the country like US, has a capital of 65,000 on such workers under its H1B visa programmed, with the majority going to India.

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 needs education push to stay ahead of China in IT

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.

Nasscom: China cannot outdo India on outsourcing

India will remain the most preferred destination for the global outsourcing business ahead of China even though the Asian giant is making fast strides in the area, says a major Indian lobby for the services sector.

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

IBM, Allianz In New $330 Million Outsourcing Agreement

International Business Machines Corp. (IBM) Tuesday said it signed a $330 million, seven-and-a-half year outsourcing agreement with Allianz SE (AZ) for information-technology support.

The companies said IBM will provide Allianz with a single service management framework that includes data center services, storage management, back-up and recovery, system software support and desk-side services including email.

Allianz's Fireman's Fund Insurance Co. had previously outsourced some functions to IBM. The new IBM agreement now also includes Allianz Life Insurance Co. Of North America.

The agreement reflects about $200 million of new business for IBM. Allianz expects its two businesses to save about 20% of their current annual IT infrastructure expenses with the pact.


Defense Agency Proposes Outsourcing More Spying

The Defense Intelligence Agency is preparing to pay private contractors up to $1 billion to conduct core intelligence tasks of analysis and collection over the next five years, an amount that would set a record in the outsourcing of such functions by the Pentagon's top spying agency.

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.

Outsourcing Your Healthcare

Medical tourism, or travel tourism as it is sometimes called, has been picking up momentum in the United States, where the costs of health care are often times quite excessive. Medical tourism is the practice of traveling outside of one's home country to simultaneously receive medical care (at a significantly lower cost) and take advantage of the opportunity to see a new travel destination, like Panama, Mexico, or India.

The cost saving benefits are clear: for example, the average cost of a U.S.-performed breast augmentation is $8,000. The same procedure performed in Costa Rica costs a mere $2,900. The savings of over $5,000 easily covers your travel expenses and accommodations. Of course, there are some risks to consider as well. But overall, look for this trend to become more popular.

Monday, August 20, 2007

Outsourcing isn't child's play

If you are one of those entrepreneurs yearning to join the global outsourcing bandwagon, think hard before you take the plunge. For, life isn’t a bed of roses there. If you fail to live up to quality standards and other pre-requisites set by the large companies and retailers, you could end up with huge losses.

Last week, a Chinese toy maker committed suicide after the US toy company Mattel decided to recall nearly a million plastic pre-school toys that the Chinese company had produced for its Fisher Price label, after it detected excessive amounts of lead in the paint used.

Mattel said excessive quantity of lead would be harmful to children’s health. The supplier could not cope up with the thought of running up huge losses. Add to that the embarrassment of having, in a way, caused irreparable damage to the credibility of Chinese companies engaged in contract jobs for large US and European firms.

“While factories are given the opportunity to improve their working conditions, certain violations are not tolerated and will result in an immediate banning of factory production for Wal-Mart.” In 2005, 141 factories were permanently banned from doing business with Wal-Mart, primarily because of underage labour violations. In addition, Wal-Mart disapproved another 23 factories as a result of multiple instances of non-compliance with the standards of suppliers.

It is indeed interesting to note how a big retailer like Wal-Mart, which buys merchandise from suppliers located in more than 60 countries, manages to keep a tab of how these suppliers comply with standards.

“We created one of the most active supplier monitoring programmes in the retail industry. In 2005, we audited more factories than any other company in the world, performing more than 13,600 initial and follow-up audits of 7,200 supplier factories. We work with our global suppliers to improve workplace conditions,” says Mr Jain.

All this exercise is not only about finding problems. Big retailers also try to partner with the suppliers to resolve their problems. “When we find a problem, we fix it. Instead of halting our work with a supplier, our ethical standards team works with them, so they can improve their performance,” Mr Jain adds. Perhaps, termination or rejection of a supply order is only the last refuge. Back home, in India, the question haunting the suppliers is clear: Are we in a position to leverage the opportunities that organised retail will throw up?

As far as Indian exporters are concerned, there’s nothing new in adhering to strict western quality norms. “Indian manufacturers cannot be compared to their Chinese counterparts. China may beat us in terms of volume, but in value terms, we are clearly the leaders.

Perhaps, this is why, in the apparel sector only the regular jobs go to China while the high-end ones come to Indian manufacturers,” says Orient Craft chairman Sudhir Dhingra. Orient Craft is one of the biggest textile exporters in the country and is a leading supplier to some of the best-known international apparel brands, including Gap, JC Penny, Levi’s and Ralph Lauren.

Some industry experts do feel that manufacturers will have to self-impose a new quality regime to meet the new opportunities. “Speed and efficiency are the new battle cries. In the initial phase, some-not-so efficient players may survive.

But gradually as organised retailing gets matured, they will be wiped out,” says JHS managing director Nikhil Nanda. Delhi-based JHS, a manufacturer and supplier of dental care products to some leading FMCG and retail companies including Oral-B, Prudent, Aldi Stores, Dollar Stores (USA), Boots, Leader Price, Savon Drugs, Wallgreens and Wal-Mart.

However, coming to smaller suppliers, it’s not always as rosy as it may appear. At least, for suppliers operating on small margins. “There is a problem with the payment cycles. Also, unlike that in the west, there isn’t an organised market for rejected products or manufacturing wastes,” says Craftos director PK Saxena. Craftos is a Manesar-based manufacturing unit that supplies to some well-known home furnishings retailers.

Some others also feel that supplying to retailers in India will not be the same as that to foreign brands and chains. “Not that there will be any relaxation as far as quality parameters are concerned. One clear benefit that manufacturers will have here is in terms of the cycle time,” says a Delhi-based retail consultant.

This event is the latest in a slew of scandals involving Chinese-made products that includes seafood, toothpastes, toys, tyres, pet food, medicines and food products and ingredients, among others. Global retailers and brand owners have decided to delist many third-party manufacturers in China citing quality issues, many of which can jeopardise the health of customers.

Indian contract manufacturers, too, are on the watchlist, like those which make medicines. If it is, indeed, found that a company sold fake drugs to Americans, it would not bode well for the health of the Indian pharmaceutical industry. Says Chandigarh-based Ind-Swift Labs’ joint MD VK Mehta:

“The possibility of rejection is very bleak in the pharma sector as vendors are governed by rules of the US food & drugs authority (FDA). However, if a rejection does happen in any sector, the loss is mutual and the buyer too has to bear the brunt.” This becomes further evident if one notes that just one recall by Mattel will result in its second-quarter pretax operating income decline by $30 million or 47% year-on-year.

For the big foreign retailers, who outsource product manufacturing to low-cost countries like India and Chine, the writing on the wall is clear: the fittest survive. If you cannot adhere to quality norms, there is no room for you. Says Wal-Mart India president Raj Jain:

Insurance outsourcing can hit $10 b in 5 years

IT Outsourcing by insurance companies in India could be an $8-10 billion opportunity over the next five years, according to global offshoring advisory firm Everest Group.

The outsourceable functions include systems integration, reengineering, IT infrastructure management, business intelligence solutions and business process outsourcing (BPO). The BPO business alone is expected to account for about $4-5 billion over the next five years. Currently, the banking, financial services and insurance (BFSI) vertical accounts for about 24-47% of Indian IT companies' revenue.

The domestic insurance sector is expected to grow to $60.5 billion by 2010 from the current $10.2 billion, according to estimates by industry chamber Assocham. Over 70 million insurance policies would be sold over the next five years and insurance companies would require over 0.5 million agents, besides several thousand operations staff for tasks like claims processing and customer service, according to Everest estimates.

“IT outsourcing has assumed strategic importance. Telecom companies like Bharti and Idea have outsourced their IT functions to the experts so that they can focus on their core functions and achieve greater capital efficiency,” says Everest Group country head Gaurav Gupta said.

The BFSI sector was the highest spender on IT in 2006 and is expected to see its IT spends increase 12-27% this year, according to industry body Nasscom.

Indian IT companies, however, need to invest more in developing capabilities to tap this outsourceable market. Technology service providers can partner insurance companies for go-to-market strategies and help in expansion, Mr Gupta said. “TCS, for instance, has leveraged its experience working with global insurance majors and its acquisition of Pearl's UK back office and was involved in the operational set up of a leading insurance firm in the country,” he added.

Companies could use the output-based pricing model to develop long-term relationship with clients. “Buyers are looking for a 'partner in growth', rather than a supplier,” Mr Gupta says. To arrive at the outsourceable component, Everest Group took into account the outsourceable IT functions and the associated costs, based on its experience of working with global insurance clients. It then arrived at estimates for India on the basis of the domestic insurance market.

According to a similar projection by Everest, IT outsourcing by domestic retailers over the next five years could be an $1.5-2 billion opportunity.

Source: Economic Times