Indian IT finds promise in Europe as continent looks at offshoring

March 14, 2013

(Any opinions expressed here are those of the author and not necessarily of Reuters)

Europe’s reluctance to send information technology and other business processing work to India might be changing, based on recent financial results from companies that specialize in handling “IT and business process outsourcing” work. It looks like this is a trend that will last more than a quarter.

Many European companies have shied away from sending work overseas, unlike American firms that jumped in feet first, seeking to cut IT costs by as much as 70 percent despite the barrier between two kinds of English. Add to that countries such as Germany and France, where the divide is between two languages altogether, and outsourcing faces a larger challenge.

Big companies that deal with IT and business process work have found that establishing a beachhead near the client seems to make a difference. By hiring small numbers of local consultants, they can send most of their work to Indian offices while presenting familiar images and voices.

U.S.-based Cognizant, which has about 75 percent of its staff in India, grew European revenue more than 7 percent quarter on quarter for the two consecutive quarters that ended Dec. 31. Cognizant provides data management services to French drugmaker Sanofi SA and manages computer systems at Dutch financial services company Rabobank N.A. Other clients include AstraZeneca Plc and Philips Electronics.

“Clearly, when you think about the continent, penetration rates are lower, you don’t have the law of large numbers, and you have this meaningful secular change towards increased comfort with offshoring,” said President Gordon Coburn. “So when I look out over the coming years, certainly we would expect the continent in particular to grow faster than the company average.”

Infosys, India’s No. 2 software provider, raised its European revenue 11 percent to nearly a quarter of total revenue in the December quarter. Europe chief B.G. Srinivas credited much of that to success in Switzerland and Germany. “If you look at the last quarter alone, we have added 13 new clients excluding Lodestone and 42 clients including Lodestone,” he said, referring to a Zurich-based consultancy that advises clients on the best use of business management software that SAP AG sells. Infosys bought Lodestone for about $350 million last year.

On Thursday, Infosys said it had won a five-year contract from BMW Group (an existing Lodestone client) as a worldwide partner to manage the automaker’s computer systems. It will also open a development centre in Munich.

Large contracts tend to be around $50 million over three to five years and occasionally several hundreds of millions of dollars over five years or longer.

“Indian companies are more aggressive in continental Europe than ever before. Even second-tier companies … are increasingly trying to get on the radar of the European IT buyers,” said Frederic Giron, vice president and principal analyst at Forrester Research.

Work includes maintaining simple software programs, fixing bugs, applying patches as well as complex ones like managing IT for stock exchanges, banks, airports, global supply networks and so on. It also includes maintaining computer networks, often large banks of computer servers and providing technical support to clients’ offices via phone, Internet, dedicated lines, etc.

India’s IT industry will touch $108 billion in annual revenue for the fiscal year that ends March 31, according to a February estimate by the National Association of Software and Services Companies, NASSCOM, a lobby. The United States and Britain are the top two markets, with the United States alone accounting for more than 60 percent of revenue.

Wipro is India’s third-biggest software services firm in terms of revenue. Its European revenue rose 5 percent to just under a third of total revenue in the December quarter from the same quarter a year ago. HCL Technologies has won 12 multi-year, multi-billion-dollar deals with Fortune500/Global 2000 corporations this quarter, six of which were large, integrated engagements. Most are from the Americas and Europe.

Tata Consultancy Services is India’s top software services provider with annual revenue of more than $10 billion and some 260,000 employees. Revenue from Europe, its largest market after the United States, rose 4.3 percent to 26.6 percent of the total. Much of this came from Britain, but continental Europe makes up nearly 10 percent of total revenue.

“I would not be surprised if Europe grows faster than many other markets in which we operate,” CEO Natarajan Chandrasekaran told analysts in January.

(Follow Harichandan on Twitter @arakali )

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