Despite guiding a lower Q1FY10 revenue and profit, the Wipro management sounded more optimistic than its peers on the outsourcing scenario turning positive.
But there is cause for ample pessimism for the Indian outsourcing industry, though the current scenario is not without some positives and perhaps even a few opportunities.
Confirming the widespread view, the closely-watched TPI Index of global contracts released on Tuesday shows the global outsourcing mood is likely to continue to be soft.
However, clients in some verticals are more prone to outsourcing to beat the slowdown.
Houston, Texas based TPI, the world’s largest sourcing data and advisory firm, tracks
commercial contracts worth more than $25 million.
According to the latest Index, just 141 deals worth $19 billion (total contract value or TCV) were contracted in the first January-March quarter, a drop of 21% compared with the previous quarter and down 22% over the same period last year. The average contract value (ACV), which is derived by dividing the TCV by the duration of the contract, was down 18% and 27%, respectively, at $4 billion.
Significantly, this is the lowest first quarter TCV since 2001 and the lowest ACV since 2003, TPI said. In the immediate past quarter (ending December 2008), 160 contracts totalling $24 billion in TCV were signed.
Commenting on the TPI findings, HSBC analysts Sanjeev Kaushik and Yogesh Aggarwal said, “We find the TPI remarks negative for the Indian IT sector and
we maintain our cautious view on the sector.”
Another interesting finding is the falling deal sizes, with 43% of the contracts during the quarter worth below $50 million and 80% under $100 million. This apart there was a skew towards the bigger IT players for award of most of contracts. Just 25 companies cornered 40% of them, the report said.
This also points to the fact that incumbents are well placed to continue with clients tending to award contracts to existing outsourcers, even though in smaller deals spread over shorter durations without any long-term commitments.
Vendors who are winning deals in the current environment, even if smaller, are well placed to ramp-up the contract works when the macro environment improves and clients commence IT spending. This underlines our thesis of a second half recovery for the Indian IT sector, albeit a modest one, HSBC’s Kaushik and Aggarwal observed in their note.
While IT outsourcing did show some tendency to keep the momentum, the biggest worry is on the BPO front, which saw the weakest TCV and ACV quarterly performance since first quarter 2007 — of $4.6 billion and $0.8 billion, respectively, and just 40 contracts compared with 52 in fourth quarter 2008. The decline in demand is largely due to the perceived transformation effort that BPO entails for clients, TPI said.
However, India based service providers continued to show strength in application development with at least two signing 10 or more contracts while 41 signed one to four deals and five firms accounted for five to nine contracts, it said.
Another positive from the Index is that verticals like media, retail, utilities and telecom showed consistent growth in the first quarter. While 40% of media contracts averaged about $100 million, retail contracts increased 40% accounting for 30 deals though TCV and ACV dropped to the lowest in five years. There was robust activity in utilities with more firms in the Americas outsourcing their needs while telecom saw the highest number of contracts at 99 deals.
