The Hindu Business Line : `Clients now ask probing questions'

"Recessions and slowdowns are a cyclical fact of life in the US economy, so it's best to make 2008 plans that include both a slow growth and a recession scenario."

When Susan Cournoyer said this to eWorld in January last year, she might not have imagined the depths to which the global economy would plunge during 2008. We went back to Cournoyer to see what she thought 2009 would be like, considering she saw the light so early last year. Excerpts:

After the events in September that affected the financial industry, what macro shifts in IT spending in banking, financial services and insurance (BFSI) do you see? We have pulled down predictions for next year. The market continues to deteriorate. Several weeks ago, we said that spending in the financial markets would decrease by 5 per cent. We now estimate a negative 9-10 per cent.

Which components of the market would see a slump worse than 9 per cent and which ones would be better off?

There are differences in areas and differences in region, and by components. Internal services is hit very hard, there are substantial layoffs in the financial sector. Hardware is hit as hard. Systems integration (SI) is affected but that is not uniform across the board. But, a lot of projects that were priorities last year will not be so in 2009.

SI has been resilient over the past few years and there are a still a lot of projects that are important but overall, SI is looking at 5-10 per cent decline for 2009.

`Winners' is a little too optimistic - but software and hardware support may be more resilient. It looks like BPO could actually pick up more business.

But so far, there have been few indications of that: BPO companies in India have seen as much pain as IT companies have. Compared to 30 per cent or more growth in the past, now expected growth is between 10 and 15 per cent.

I would agree. We haven't seen that many contracts yet. But I have had conversations with mid-sized and large financial firms in the US, doing a lot of due diligence with BPO providers. A customer is looking at 100 per cent of what he could outsource, but has achieved 30 per cent. They are looking at what it would take to achieve another 40 per cent. A good chunk of that is BPO.

Quite a few firms are looking in that direction - and I am having such conversations again and again. I would not project a huge increase in deals but due diligence is certainly happening. There may be some contracts that would flow in the in the middle of next year.

If companies are not already into consulting, aren't they worse off? The opportunity to create trickle-down effect for services is missing.

It does seem true that financial firms are reaching out to consulting firms to talk about risk and compliance and what they should be doing, and are also talking to consulting firms about transformation.

But, as I hear from my peers in Gartner - there is so much paralysis around regular projects that even though there may be some compliance-related consulting work, (not too many consulting opportunities are there yet). (What we might consider bread and butter for consulting and SI firms). It could be true that in 2009, firms get some straight forward directions form regulators and start moving on direct projects, but it would take some more time.

I used to work for a regulator - they are generally behind the market. Consulting may not be a driver for a huge opportunity in 2009. Maybe in 2010 and 2011. There is still too much confusion for a consulting boom soon.

Just after the 2001 slowdown, giants emerged out of India, benefiting from the offshore momentum that had built up. Now, do you see any more separations with the top two going way beyond the bottom three? Also, would we see a twoyear lag as we did last time for the offshoring momentum to pick up?

I do think there would be a lag. Particularly because this time around, even though regulators (haven't issued near-shore and onshore guidelines) there is uncertainty (among clients). So there would be no big pick up in offshore services in the next 12 months. But beyond that, regulators have shown again and again that they do not require that services must be performed on shore. Insurance, for decades, they tend to have a free market perspective, even in the financial regulatory system. That would mean momentum for India-based services. But for a year now, people will wait out to see what it is like.

As to winners among Indian top firms, clients are able to differentiate now between what vendors have to offer. Clients are calling me to ask probing questions now. "Which Indian companies have superb industry skills and proven experience in their sector?" That wasn't something they asked in 2000. They simply asked who had bodies, who had a good bench and who was cheap.

Some of these vendor firms have already made bets in different sectors.

For example, Tata (TCS) has focused on the securities space, (some others) are into commercial banking, Infosys is focused on retail banking.

Clients are asking more questions about such capabilities. Wipro, which does have experience in retail banking, would now get more opportunities to showcase its skills, which it didn't necessarily in the last cycle.

Do you see existing models reinforced or new business models emerging? The last time around, post 2000, we saw IBM and Accenture embracing the India story.

Clients could well fear alternative delivery models but this may be a prime time for clients to investigate things such as cloud computing infrastructure management outsourcing from Indian providers. That would change the landscape for the global US providers.

Software vendors should be attentive to the fact that this could be the time when software as a service (SaaS) comes into its own. IT providers are positioning for that. For example, Accenture is trying to position itself to assist in that transformation. That could have major implications for consulting and SI firms.

This could be a time when several parts of the markets have suffered in moving to new technology and this could be the breaking moment for those.

There aren't too many mega deals now, we do see some bundling, some integrated deals - even though these are not multi- billion dollar deals. For instance, in some deals both IT and BPO deals are going to the same vendor. What is your view?

I don't think we will see a re-transition to mega deals. But I do see companies wanting a fairly limited number of suppliers. Not one, not 25-30. It would be between 6 and 20 depending on the size of the financial firm. When they outsource BPO, they would prefer someone with IT services. It's even extended to the regional and mid sized financial firms requiring IT and BPO services together. It's becoming a check-off item in the due diligence.

How have you seen Indian companies using this time?

All of them are being responsive to this market situation and some are reaching out proactively to tell us how prepared they are and where they are focusing.

This includes Wipro, which is moving quickly to address possibilities it has in the market. Syntel might look at this as an expansion opportunity. They may not be a large player but they are positioned as one of the skilled providers with a focus on their financial industry skill sets.

Cognizant, though not head-quartered in India, sees this as a pretty substantial opportunity to build relationships (and expand their) footprint here.

Is having a global delivery capability a prerequisite to bid these days?

The financial industry is very cost sensitive right now. They want lower cost but at the same time they are looking at industryspecific skills sets.

Here is an interesting comment that a mortgage brokerage made to me. While looking at lower costs, it was also looking at opportunities to engage with global consultancies. One of the advantages for new companies is that they come with a fresh outlook or point of view.

Decades of experience in the mortgage industry is seen as a disadvantage. With all the regulation coming next year, everyone has to learn on the job. (The new guys) don't have decades of ingrained prejudice about what mortgage processing and origination should look like.

Last year, budgets that are typically decided ahead of the calendar year were only decided in March. How about 2009?

We sent out an IT budget survey before the Lehman Brothers' announcement. We had to completely stop that. I expect that it could take longer than March this year for those decisions. Decisions could be monthto- month.

First six months of the year could continue to see a lot of uncertainty, momentum in decision making would be slow through that time.

Any views on mergers and acquisitions (M&A)? Most Indian companies have that kind of cash. Any more on the horizon such as HCL and Axon?

It's not clear that global US firms are prepared or even interested in making a lot of acquisitions right now. I haven't seen an appetite for IBM or Accenture to expand and grow. They are focused on maintaining their current manpower.

Beyond IT, for example, the Japanese have been busy making acquisitions - Hitachi and Fujitsu - they may even accelerate in the slowdown. For years, Japanese companies have been buying financial boutique firms.

Likewise large Indian firms would like to pick up some niche firms in the US. Financial services software firms such as Sungard would be using this opportunity to expand their footprint.

When would this happen, given six-twelve months of muted/nil growth in IT spending?

It is hard to see a lot of M&A for the next three-six months. Everyone . even companies doing due diligence would take time to do that. By mid-2009 we could see some substantial M&A and consolidation activity among IT firms.

You had earlier indicated that IT companies should offer flexible contracts, with the bulk of the contracts built-in at the middle and later stages of the deal.

A lot of IT services companies across the world have been offering that to the best of their ability in this market. Part of the issue is there is so much chaos and uncertainty - we have had two-three months of just paralysis with financial companies. More crucial is to keep those on the table in Q1. For two to three months now, it is a matter of keeping relationships in place while people go through this psychological shift to understand how things have changed. Q1 and Q2 (of 2009 calendar) could show up the winners from the losers among IT services firm.

How promising do outsourcing opportunities from Europe look?

The European market does not have the same perspective on layoffs. There are no huge numbers of layoffs and the opportunities that go with that. But there would be a lot more BPO opportunity. They are more interested in outsourcing but are constrained by labour regulation.

In sum.?

Expect nothing much in the first six months of 2009. There would be some contracts but IT services providers should stay in the field. A lot is happening, not on the deal-signing front, but in due diligence. Clients would consider some things never considered before - BPO, or SaaS.

This would be a period of intense review and reprioritisation. It is a time to build relationships and capture new directions in the market. This would be a time for conversation and re-evaluation.

Things won't remain quiet but there would be intense review and new directions would be set. It takes a little while for moving a big ship. It does not happen overnight but this market could take a new direction in terms of choice of IT providers, the types of services clients want and the like.

It is no time to retreat, but to be flexible, to negotiate, to put the offers on the table and you could be running in the second half of the year.

bharatk@thehindu.co.in

SKETCH BY R. RAJESH

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