The Hindu Business Line : IT’s opening up

The hitherto elusive Continental Europe, which has for long been on the radar of Indian IT outsourcers, is gradually warming up to the concepts of off-shoring and outsourcing, thereby opening newer vistas for domestic vendors even as economic recession dampens growth in the traditional market, the US.

Indian outsourcers have been steadily increasing their presence in countries such as Germany, France and Benelux, and return on these investments is now not too far. For large outsourcers such as Tata Consultancy Services (TCS), Infosys Technologies and Wipro Ltd, revenues from Continental Europe have grown steadily in the past few quarters and now account for about a tenth of their total earnings.

“Continental Europe as a market is ripe for outsourcing,” says London-based Punit Bhatia, Associate Principal of the Everest Group. Customers in Continental Europe, who initially did project-based outsourcing, are now becoming more comfortable with the concept of off-shoring that helps them to take out the cost pressures.

According to TPI Index, about 126 contracts worth Euro 25.5 billion were signed in Europe, West Asia and Africa in the first half of 2008, the highest in the past six years. During the same period, about 119 contracts worth Euro 10.6 billion were signed in the Americas.

“There is a push to offshore,” says Roop Singh, vice-president, financial services, at Wipro’s European operations in London. “Besides aiming to take out costs, customers are looking for partners who are capable of delivering transformation deals,” Singh says. Wipro is seeing customer interest in the banking, financial services and telecom sectors.

Ovum, the London-based research firm, estimates the IT outsourcing market in Continental Europe (Western Europe excluding the UK market) to be at over Euro 49 billion in 2009, growing at around 7 per cent year on year, and the BPO market at Euro 13 billion, with growth at 10 per cent. “Indian outsourcers have been increasing their focus on Continental Europe partly to balance their business away from an over-reliance on the US market,” says Samad Masood, research analyst at Ovum.

Currently, Indian vendors earn about 60 per cent of their revenues from the US, their belligerent growth engine, while Europe accounted for less than a third of earnings. The Rest of the World (RoW) including Asia-Pacific, accounts for a tenth of the Indian firms’ earnings. The under-penetrated Continental European market leaves a lot of head room for growth for the Indian vendors, who are aggressively expanding their footprint in the region.

Everest’s Bhatia says if one considers US to be fully penetrated from an IT outsourcing perspective, the UK would stand at 80 per cent, Germany at 70 per cent and the Netherlands at 50 per cent, while all the other countries are less than 20 per cent.

“The openness to outsource and offshore depends on the maturity of the market and how global the client is,” says Girish P. Ramachandran, director, Europe, for TCS. “In markets such as Nordics and Benelux, offshoring/outsourcing is common whereas markets such as Germany and France are yet to mature to the promise it can deliver,” he adds. TCS, which serves over 150 customers in the region, has grown considerably in Continental Europe, which now accounts for 11 per cent of its overall revenues.

“Credibility is high and we see more opportunities, going forward,” says S. Gopalakrishnan, CEO and MD of Infosys Technologies, which had significant client wins such as ABN Amro and Philips in recent years. Continental Europe accounts for a third of Infosys’ European revenues.

As the economic recession spreads to Europe and casts a shadow on the Continental European countries, industry players expect customers in these regions to take to off-shoring seriously. “Continental European firms are in a state of transition due to the credit crisis. Though customers have less money to spend, business activity will neither reduce nor come to a complete standstill. Hence, they are open to the idea of IT offshoring than ever before,” says Peter Heij, head of Continental Europe for Satyam Computer Services Ltd.

Local barriers

But are Indian vendors fully geared to take advantage of the unfolding potential in the region? “May be, but not completely,” says Diptarup Chakraborty, analyst at Gartner. Indian firms need to have more dedicated people in the region to address customer requirements. Unlike the US and the UK, Continental Europe has been a tough market to crack. Besides challenges relating to language and cultural issues, Indian vendors are facing intense competition from local European vendors.

“Indian vendors did a mistake in terms of understanding the market. They initially thought that strategies adopted in the US would work well in Europe too,” says Bhatia.

Traditionally, European countries — barring those in the UK and Ireland — have been shy to the concept of sending IT jobs overseas largely because of cultural issues. Also, there are stringent labour laws in these countries that secure employee rights. Moreover, every country in the continent follows different practices of doing business. “Each market is different and one has to understand the country and the language challenge before one starts seeing success here,” says Ramachandran.

Having said that, Indian vendors have been investing in developing the capabilities required to address the market. While Satyam, Cognizant and Sonata Software have partnered with local services firms to address the markets,

Wipro and Infosys have taken the acquisition route. Wipro has three acquisitions in Europe till date, while Infosys acquired the captive BPO operations of Philips, which helped it expand delivery footprint in the region.

All large Indian vendors have multiple delivery centres in Europe to cater to clients’ near-shore requirements.

“Indian vendors are also entering into more innovative contractual relationships to enable them to enter new markets such as infrastructure outsourcing or knowledge process outsourcing,” says Masood.

They are signing agreements whereby they do not take over infrastructure assets (which would be normal for a domestic infrastructure outsourcer), or entering into business-outcome focused payment terms in KPO, Masood adds.

European outsourcers, Masood says, have much stronger and more senior-level links within domestic client organisations than the Indian outsourcers. “They also have stronger cultural affinity, brand awareness and trust,” he adds.

However, most European-based outsourcers do not have as heavy an investment in offshore low-cost delivery as Indian and US competitors, and therefore they may not be as price competitive.

“Nonetheless, given that European clients tend to favour trust over price when outsourcing, local outsourcers pose a significant threat to Indian outsourcers’ ambitions in Europe,” says Masood.

Having realised the importance of the offshore component, European vendors such as Capgemini and Atos Origin have been ramping up their India operations significantly.

Everest’s Bhatia says the strategies adopted by Indian firms to address the Continental European market are largely on track.

“Partnering with best local brands is the best way to penetrate the market,” Bhatia says, citing the recent Cognizant-T-Systems partnership, where T-Systems has a strong local footprint, as a good example.

Two main objectives

Ovum’s Masood says there are two main aims for Indian vendor investment in continental Europe: Either to increase onshore delivery capability for work that cannot be delivered offshore, or to increase sales and client relationship activity onshore so as to build closer and more in-depth strategic relationships with clients.

Continental Europe currently accounts for half of the European IT outsourcing market. “There is a lot of untapped potential in Continental Europe, which will definitely overtake the UK outsourcing market, going forward,” says Jimit Arora, Research Director, Everest Research Institute, based in Gurgaon.

vishwa@thehindu.co.in

With inputs from Adith Charlie

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