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U.S. financial crisis will hit IT outsourcers more

September 29, 2008

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According to some industry analysts, IT companies that outsource to India or China will be more affected than the ones that operate mostly for clients on their own turf.

Sudin Apte, an analyst at Forrester Research says "of course, the key question is whether the crisis has already hit the bottom or will the situation get worse before it gets any better."

As it stands now, Forrester estimates that most IT budgets in the banking, insurance and financial services sector will be reduced by at least 15 percent to 20 percent. And that's a very conservative estimate. Other analysts aren't as positive, and see the situation deteriorating itself rapidly.

NASSCOM (The National Association of Software and Service Companies) in India has also said that the crisis in the U.S. financial services sector will have a serious and detrimental impact in the short term on Indian outsourcers, as new projects will either get delayed or cancelled alltogether.

However, the trade body says it won't decide until December whether to revise its target of US $60 billion in IT and business process outsourcing (BPO) exports by 2010. Some observers think that NASSCOM should revise its numbers now rather than in December.

Overall, software outsourcing to India and China is likely to be hit much harder than BPO because spending on IT tends to be more discretionary than spending on business processes, said Nikhil Rajpal, principal of Everest Group, a research and advisory firm.

Revenue from banking, insurance and other financial services customers already account for a large proportion of the revenue of Indian outsourcers.

For them, the outlook is quite grim as some of its customers like Lehman Brothers are no longer even in business, said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International. For those financial services companies that continue in business, software applications and new IT projects are not the top priority as they figure out what to do about the crisis, said Pai, who added that even ongoing IT projects may be slowed or cancelled alltogether.

For instance, India's largest outsourcer, Tata Consultancy Services earned 43 percent of its revenue in the second quarter from the banking, insurance and financial services sector, while Infosys Technologies, the country's second largest outsourcer, got 34.5 percent of its revenue from this sector.

About 15 percent to 18 percent of the business coming to Indian outsourcers from banking, insurance, and the financial services sector is now uncertain, Apte said. Infosys has said that its revenue and staffing targets have not changed as a result of the financial crisis.

Infosys didn't comment as it says it is in a "silent" period ahead of its quarterly results announcement in mid-October.

Investment banks that survive this will want to offshore more to get higher cost benefits, Rajpal said. But investment banks don't ship work offshore in as large volumes as retail banks and other retail financial services companies, he said.

The common view is that companies send more work offshore in times of crisis, to take advantage of lower costs in India and other locations. "We do expect that a tightening of budgets in the U.S. will lead to more work being sent offshore to India," said a Nasscom spokeswoman. Still, there are many that disagree.

The problem at this time is that a lot of the customers of Indian companies like Lehman Brothers and Merrill Lynch will not exist anymore, Apte said, and that is one of the root causes of the many other problems that are exected to hit the IT sector soon.

The crisis in the U.S. financial sector will in the medium to long term lead to more work being moved offshore, as the companies try to cut costs, Rajpal said. Retail banks in the U.S. that went through a crisis in 2007 are beginning to step up work offshore to locations like India to get quick savings, he said.

If the crisis on Indian outsourcers will last for at least another three to four years, the impact on the financial services sector could get worse, Apte said.

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Source: Business 5.0.