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Mr N. Chandrasekaran, COO, TCS.

Adith Charlie

Mumbai, Oct. 30 The global financial crisis seems to have prompted client companies to outsource IT projects of a more traditional nature as is evident from the September quarter numbers of major IT firms

Indian IT firms have shown a significant jump in sequential revenues from the application maintenance and development (ADM) practice for the quarter ended September 30.

While ADM revenues have gone up by 13.7 per cent for Tata Consultancy Services, it has gone up by 9.8 per cent and 8.7 per cent for Infosys and Satyam respectively.

Similarly, the custom applications practice of HCL Technologies has gone up 7 per cent compared to the previous sequential quarter.

ADM has traditionally been the bread and butter business of IT companies.

And even within ADM, it is the application development part (which entails maintenance of applications already developed) that would show higher growth in the September quarter, said Mr Rishi Maheshwari, Independent IT Analyst.

“This is because volume growth has hardly been there on a quarter-on-quarter basis,” he said.

However, before the start of the US recession there was a visible trend of ADM component slowing down (as a percentage contribution to overall company revenues) because Indian companies had begun to pursue more of high-end work such as consulting services, product engineering, infrastructure management etc.

Unfortunately, analysts say that these high-end outsourcing initiatives are a part of the client’s discretionary budget, which is clearly under pressure.

“Given the volatility in the market, there is a decrease in incremental IT spending. And hence there is an increase in outsourcing contracts that entail maintenance of existing applications (or development around the existing applications) rather than transformational deals,” said Mr Ashish Basil, Partner, Transaction Advisory Services, Ernst & Young

The migration from an old IT environment to a new IT set-up (including applications, infrastructure etc) is an example of a project that is transformational in nature.

“Given the situation in the financial services space, it is fair to expect more of ADM revenues.

In the last three quarters we are seeing delays in decision making of transformational projects,” said Mr N. Chandrasekaran, Chief Operating Officer and Executive Director, TCS.

With the end of the current crisis nowhere in sight, analysts feel that the trend of increase in ADM revenues would continue in the short-to-medium term.

Moreover, all major IT companies are now focusing more on large ticket size deals (anything upwards of $75 million) which enable them to engage with a client for five years or more.

“This improves the earnings visibility for these companies. The other advantage is that long-term deals will always have a higher ADM component,” said Mr Basil.

More Stories on : Outsourcing | Outlook | Financial Markets

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