The Hindu Business Line : US crisis has not hit contract renewals, says TPI

Bangalore, Sept. 28 The US financial crisis is having an adverse impact on the Indian IT sector as customers reduce or delay their spending on deploying new technology applications. TPI Inc, the largest sourcing data and advisory firm that accounts for a fourth of outsourcing deals worldwide, recently launched a new business unit TPI Momentum for the IT services providers.

Through the new unit, TPI aims to help service providers address the changing requirements of outsourcing and offshoring service buyers. Business Line caught up with Mr Peter Allen, Partner and Managing Director of TPI, to get his perspective on the changing market dynamics.

Excerpts

What’s your assessment of the US crisis and how will that impact the Indian vendors?

With companies such as Bear Stearns, Lehman Brothers, Merrill Lynch and AIG becoming non-independent or going away entirely, I think we have lost four to six per cent of the buying universe in the capital market segment. The market opportunity for Indian companies will become small to that extent. There is a risk of some impact on captive centres those firms operate in India and non-trivial work displacement. There is also likelihood of a further pull back of discretionary work. A lot of work that’s outsourced to India is discretionary project work. Anything that’s discretionary is at a risk in the near term.

Has this crisis spread to other verticals?

It is hard to find a vertical that’s untouched by the crisis. Verticals such as insurance, retail, travel and transportation, hospitality, healthcare and life sciences are all impacted by crisis in some or other way. We are seeing early signs of stress in consumer oriented durable goods sectors such as automobile, consumer electronics. Anything that requires credit to purchase will be at risk. The government’s action to stem the problem is really the key and if that does not go through for some reason, there is real concern. However, the outsourcing industry is going to be a tool for recovery when this crisis is over and we are back on trajectory of growth.

How is the crisis impacting the emergence of new outsourcing deals?

Already, we are on path to be the greatest year in terms of outsourcing deals. In the first half, we have almost $50 billion worth of contracts. The third quarter is looking quite strong. However, my sense is there seems to be some slowdown in the fourth quarter largely because of the uncertainty.

Where do the renewals/ renegotiated contracts stand?

There is no real change in contract renewals or renegotiations for most parts. About 30 per cent of our work is contract renewals and it continues to be at that level. We don’t see any termination of contracts due to the crisis. Outsourcing provides clients with a variable cost model. If they want to spend less, they don’t need to terminate the contract. They just need to exercise their rights to adjust volumes. I don’t see any structural changes in those relationships.

Do you see any changes in the outsourcing deals per se?

Nothing driven specifically by the crisis. However, there is renewed interest in monetisation of captives especially from companies that aren’t able to scale up.

Will clients use this crisis to drive down the billing rates?

The bill rate pressure has always been there and continues to be there. However, I have not seen any signs of clients looking to use the crisis as a trigger to lower rates. Getting rate concessions doesn’t solve the problem that this fundamental structural financial confidence is introducing to our markets. That leaves like a band aid on a severe wound. Most of the clients are focused on severe wound.

How is the scene in Europe?

Europe has been the market leader in outsourcing for the past eight quarters. We think there are signs of similar structural issues in the financial markets and client concerns might introduce slowdown in the coming quarter. Certainly, service providers are concerned about Europe and they think that Europe may very well be following the US in terms of real risks to the financial markets. There seems to be some signs of slowdown in start of new initiatives in financial services, which typically indicates some management distraction or focus in other areas of business. However, other verticals such as telecom, manufacturing, pharmaceutical and life sciences across Europe seem to be strong.

Do the top six European vendors continue to walk away with disproportionate share of contracts in the region?

The recent contract profile in Europe is disproportionately large infrastructure-based. These capital intensive infrastructure contracts typically go to multinationals that have established foot print.

Have the Indian vendors grown ahead of expectations in Europe?

In certain way, they are. In application services, the Indian providers are at the top of the list. In certain BPOs such as finance and accounting, several of the Indian providers are among the top tier.

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