BPO giants report results
Two of the leading Indian BPO providers have reported healthy financials that cast an interesting light on the state of the market.
First up, Tata Consulting Services reported that software application development and management now makes up less than half its revenue, replaced by consulting, business process outsourcing, and infrastructure services.
TCS’s net income for the quarter was $313 million, up 45.1 percent from the same quarter last year, and revenue was $1.42 billion, up 45.2 percent. For the first half of the year, net income was up 50 percent over the previous year to $604 million, and revenue was up 44 percent to $2.7 billion.
“Our strategic investments in new services like consulting, infrastructure and platform-based business process outsourcing as well as new markets are helping accelerate growth and diversify our revenue base,” said chief executive S. Ramadorai.
The company said it hired 12,523 employees in the quarter, of which about half were “trainees” while it also it hired 966 employees in overseas subsidiaries and branch.
Chief operating officer N. Chandrasekaran said that infrastructure management contracts are increasing in size. “Those deals used to be a half-million dollars; now we’re seeing deals of $200 million to 300 million,” Chandrasekaran said.
But there is some concern that US banks may reduce orders or seek lower prices next year after mortgage losses eroded profits. “ Some discretionary spending might go away,” said chief financial officer S. Mahalingam. “Customers who have taken billion-dollar hits might ask for some short-term arrangement on prices.”
Meanwhile Infosys Technologies, the second-largest computer services provider in India, said second-quarter profit increased 18 percent as it won orders from companies including Royal Philips Electronics. Net income rose to 11 billion rupees, or $280 million, or 19.19 rupees per share, in the three months ended 30 September from 9.29 billion rupees, or 16.37 rupees.
But Infosys stock fell as much as 7 percent on concerns that gains in the rupee and any slowdown in the US would cut profit. Infosys is aggressively chasing mega deals that could accrue $1 billion to the top line over the next few years. The company is pursuing 12-14 deals and 70 per cent of these would be above the $100 million range. “Our ability to win large deals is going up,” said Infosys CEO Kris Gopalakrishnan.
The company recently added a $100-million, multi-year order from a Canadian transportation firm. Besides, it recently inked the $250-million Royal Philips Electronics BPO deal. Infosys’ top 10 clients contribute 29.9 per cent to revenue at the end of September 2007. It has three clients in the above $100-million range and 16 in the above $50-million range.
The company said it was open to the idea of acquisitions. Gopalakrishnan said: “We will scout for acquisitions and will be focused on finding the right company like Philips BPO. We will be selective in our buyouts and look for companies that makes strategic sense and adds value.”
Ovum analyst Samad Masood said that Tata will be looking overseas for growth. “Having become well-established on the UK market, TCS is now targeting more business on the continent, specifically German,” he said. “Indeed, TCS’s VP Natarajan Chandrasekaran has previously summarised TCS’s strategy for Continental Europe as ‘Germany, Germany, Germany!’ This makes good sense since Germany is the second largest IT services market after the UK in Europe, and TCS already generates €100 million in annual revenue from the country. But despite Chanrasekaran’s exuberance, TCS’s ambitions don’t stop at the German borders. It has defined 8 regions which it targets for growth: Nordics, Benelux, Central (Germany, Austria), Switzerland, France, Eastern, Southern (Italy, Greece), and North Africa.
“But the big challenge for TCS will be to overcome cultural and language barriers in these regions to establish a successful business. In Switzerland and France, TCS has pursued a partnership strategy, working for around 20 years with TKS-Teknosoft which re-sold its services into these countries. TCS acquired TKS-Teknosoft in November last year, and has been positive about the benefits of entering a European country in this way, claiming that the local face and reputation that TKS-Teknosoft brings helps to win over new clients as well as attract senior onshore staff.
“Both of these things are vital for growth in Continental Europe, where clients are more cautious of working with unproven offshore firms, and also like to have a significant proportion of the work provided onshore. To support this requirement for proximity to the client, TCS has already set up near shore centres in Luxemburg, Hungary and Morocco and is looking into opening further centres in Eastern Europe and Egypt.
We wouldn’t be surprised if TCS uses a similar partnering/acquisition model to access more business in its 8 targeted regions. The only challenge will be identifying the right partners and building good relationships with them. But TCS is already the largest offshore player in Europe, and this, combined with its deep wallet, will be a strong incentive for potential partners. As TCS pushes this strategy further, we expect the established vendors to feel more competition from India, India, India.”
Of Infosys, Masood argued that the performance of the firm was “stellar” despite the share price drop. “A strong currency hedging strategy will remain central to Infosys’s profitability going forward,” he said. “The real hurdle is to break the link between revenue and cost growth to create “non-linear” growth. Or in other words, to generate more revenue from services that do not rely on a parallel investment in staff volume.
“One way Infosys is focusing on non-linear growth is by developing “point solutions” in financial services, around risk and compliance, data management, enterprise agility, and technology optimisation. Another is in BPO, where progress has been significant this quarter – thanks to the groundbreaking deal with Philips. Under this deal, Infosys not only gained a flagship F&A BPO customer, but also gained shared services centres in two new countries (Poland and Thailand). Head of Infosys BPO, Amitabh Chaudhry, told analysts that these two additions meant that all the “hubs” for Infosys’s BPO hub and spoke model were now in place. He does not foresee any further expansion of this core infrastructure, apart from adding specific “spokes” in geographies where clients have a specific need for one.
“Now the BPO infrastructure is in place, the next steps for Infosys are to sell more asset-led business and more repeatable solutions work that can help it grow revenue per head. Outside of BPO, Infosys has to distinguish itself as a business solutions provider, and continue to distance itself from the “body shopper” image that Indian firms are traditionally lumbered with. And as rupee appreciation continues apace, this need becomes ever more urgent.”