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Friday, December 30, 2005

Offshoring IT Services : Signals Getting Stronger

Ronna Abramson finds that an increasingly huge pool of global demand makes it a good bet for India's top IT outsourcing firms to outrun their larger rivals in 2006. The year ending Mar 2006 will mark a milestone for Indian offshore outsourcing firms - Infosys and Wipro, as their revenue crosses the $2 billion mark. Satyam has already crossed the billion dollar run rate this year. Ronna finds that the streak will continue in part because Indian firms have just scratched the surface of potential demand. The statistics related to offshore outsourcing makes an interesting reading.
Goldman Sachs estimates suggest that the offshore model has penetrated less than 10% of Global 500 IT budgets for core application maintenance and development work and as the Indian companies are expanding into new areas such as network and data-center management, consulting, and business process outsourcing of such departments as human resources and accounting. As far the multinationals leveraging offshore, analysts widely believe there's so much offshore opportunity that the multinationals will have little effect on Indian firms' revenue.The growth may hinge upon the ability to attract talent. Richard Schroth, a senior fellow with Katzenbach Partners, also believes that the multinationals already have so many moving parts that adding offshoring to the mix is likely to be challenging. I earlier wrote about this - you can find them here, here, here and here.
And the multinationals still have far fewer employees in India than do the local companies. Offshore has fully moved into the mainstream from the demand, as well as delivery capability perspective and demand will likely remain very robust.Goldman Sachs has done an assessment of India's Net Workforce Growth - worth a close reading.Clearly , one can look to India to continue to remain the sweet spot of offshoring. The recently released Mckinsey -Nasscom report puts it so succintly: In the next five years, Indian IT services shall generate US$60 billion in revenue and perhaps sustain 9 million jobs and adds in terms of importance -like oil for saudi, cars for japan, services could be of such importance to india. Now many ask me how to differentiate the offshore majors( remember the core focus area amongst offshore players may vary) based on these data – all other things being equal – look at the data with this perspective:
- Long-term: Head count growth correlates 90% to 95% revenue growth (factor average pricing and pricing trends as relevant)
- Short-term: Utilization drives revenue and margin
- Operating margins seldom change drastically once stabilized.
- Look at EBITA margin & AR numbers & their correlation.
- The crucial differentiation would be Human resources and depth of talent – including attrition and lateral recruitment efficiencies
- Always ask for the depth of talent – for eg- ask for average years of experience with the organization and also ask for average experience of consultants in the IT industry – I suspect that surprisingly in most cases both are going downwards – not a healthy trend though
- Assess sensitivity for revenue mix shifts

(Image Courtesy : Thestreet.com/Goldman Sachs research)

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