The IT outsourcing story is intact

New Delhi-based HCL Technologies announced on Monday it had signed a seven-year global IT outsourcing services engagement with the Reader's Digest Association worth $350 million (around Rs 17.8 billion).

HCL will provide application development and infrastructure support across the application stack of Oracle Universe, open technologies, mainframe infrastructure support for network, security, storage, end-user computing and data centres, including disaster recovery services. It will also rebuild and migrate RDA's mainframe environment in its New Jersey data centre facility.

Analysts see this and another half-a-dozen big deals signed in the past three months by Indian IT firms, encompassing both global and domestic markets, as evidence that the outsourcing story continues to progress as the best option for companies to cut costs in the current difficult economic environment.

Besides value addition, almost all these deals encompassed end-to-end managing of the client's IT environment. For example, HCL's deal with the RDA will support the RDA operations in 45 countries and 14 languages.

"Outsourcing is becoming a strategy for everyone. Reversing this trend at this point in time is impossible. None of the global players would like to lose the business advantage they get from outsourcing. Rather, since the end of 2008, there is growing consensus that in a financial crunch, outsourcing will be an excellent tool for cutting cost," said Sabyasachi Satpathy, director and co-founder, Mindplex Consulting.

Vinu Kartha, partner, Tholons Advisory, feels that while the size of the deals has gone down, the outsourcing industry is still healthy and customers have realised the merits of outsourcing. "Cost cutting being the main priority, customers are looking at outsourcing keenly," he adds.

Concurs Aloke Shende, principal analyst, Ascendia, "If you look at 2007 and 2008 in terms of the number of deals, there is not much of a change. Deals above $1 billion remained constant at 15 for each year. And for deals above $25 million, there was an increase of 11 per cent.

While it's too early to say how 2009 pans out, it is a fact that outsourcing will continue. And, within it, the trend to offshore will increase," said Shende. He says this offshoring trend is true not only for Indian players but also for global players like IBM, Accenture and HP.

Som Mittal, president, Nasscom, a body of software companies, concurs, "The Indian IT-BPO industry is increasingly focused on expanding into less-penetrated verticals through innovative business models. This deal reinforces how global sourcing helps economies take advantage of talent, of new opportunities, which will help revive the current economic situation."

Analysts also feel the US government's initiative to tax firms who take jobs out of the US will have minimum impact on the outsourcing industry. "Yes, sentiment is impacted. In terms of contracts, this will impact the discretionary type of projects. However, infrastructure management, network support and such areas will see deals. Customers will perhaps look more at pay-per-use or fixed-price kind of deals," says Satpathy. He says new deals have witnessed a price cut of 15-20 per cent and customers would like to leverage the cost benefits this will bring.

Analysts also agree that the deals in the domestic market will play a crucial role in 2009. According to Shende, the e-governance spend for 2009 alone is Rs 6,000 crore (Rs 60 billion). Some of the states that are being aggressive in implementing e-governance projects are Andhra Pradesh, Maharashtra and Karnataka.

 "If you look at Maharashtra alone, the total IT spend is expected to increase over 20 per cent for this year," said an analyst. Agrees Satpathy, "If you look at telecom, government and other sectors, there are deals worth $4-5 billion to be won in 2009 alone in the domestic market."