The Hindu Business Line : Dip in offing?

SOURCING advisory TPI, which recently set up India operations, has seen a slowdown in the volume and size of outsourcing deals in the first half of the year.

Siddharth A Pai, Partner and Managing Director, TPI India, spoke to eWorld on the trends in the sourcing industry, and prospects for Indian players.

Compared to the first quarter, the number and total value of contracts tracked and advised by TPI in the second quarter are lower. About 54 deals were signed during the quarters, totalling about $15 billion. For the first half, the industry concluded 112 transactions totalling $28.5 billion, a 13 per cent decrease in value from the same half-year period in 2004.

Furthermore, industry-wide average total contract value in the broader market has declined considerably since 2004, for both business process outsourcing (BPO) and information technology outsourcing (ITO).

"Overall contract value and numbers of transaction for BPO remain sluggish, but HRO (human resource outsourcing) is still showing marked growth in the current quarter." Yet, compared to an average of 24 during the last nine quarters, BPO accounted only for 19 deals in the current quarter, says Pai.

Industry-wide BPO contracts got reduced in the first half of the year as clients are proving more cautious, he says. There are concerns about service provider capability and capacity. Also, clients are changing scope just before signing contracts, leading to smaller contract values; many clients are also more frequently aborting transactions, according to TPI. "However, we see a significant uptake in the number of captive centres, especially as India and China continue to be fast-growing mobile and financial services markets. Many of TPI's clients with operations in these regions prefer the captive route."

HRO is still a significant part of the outsourcing activity - accounting for 28 per cent of all BPO deals and for 33 per cent of the total contract value of BPO deals. For the first half of 2005, HRO is the largest segment in BPO in terms of total contract value and most buyers are US-based firms with more than 10,000 employees. Certain HRO providers are winning large workforce administration contracts - Hewitt won six of the 10 recently announced wins, according to TPI.

Europe is seeing a significant uptake in demand and a recent TPI survey of European clients found that 81 per cent of UK firms would increase their offshoring activity during the year. Europe accounts for 51 per cent of overall demand, says Pai, but cautions that most of the gains are going to large European providers such as ATOS Origin, BT, CapGemini, Siemens Business Services and T-Systems.

Large outsourcing deals do see the utilisation of best-of-breed players but even that is continuing to leverage the services of the Big Six players. That means that although there is a shift in the industry, there is no shift in the players. "If any of the G-2000 companies plans to outsource, they will still go to the Big Six players 81 per cent of the time," says Pai. However, Indian pure-play service providers are increasingly on the radar for large deals and TPI says that it is advising on a mega deal (total contract value greater than $1 billion) where Patni Computers is one of the vendors being reviewed.

Similarly, TCS is present on two deals totalling $1.33 billion, while Infosys is contending in two deals totalling $350 million, Wipro in three deals totalling $250 million, Progeon in two deals amounting to $182 million and HCL is present in a $100-million deal that TPI is advising on. "We are currently advising on seven mega deals totalling over $13 billion that are likely to be concluded in the next couple of quarters."

Indian pure-play providers are unable to offer a really global service delivery model and Indian operations remain a dominant part of their offering. For an IBM or an Accenture, the deal is more likely to swing their way since they can offer similarly competitive prices from near-shore locations such as Brazil or Eastern Europe, while also taking people and assets off the balance-sheet, according to TPI. Many near-shore locations, especially in Brazil and Eastern Europe, are preferred by most clients because of cultural affinity or simply proximity, says Pai, adding that they are also able to offer India-based delivery as part of their equation, at competitive rates.

priya@thehindu.co.in

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