Wednesday, July 18, 2007

India Outsourcing Giant Battles Volatile Market Conditions


Despite a challenging environment marked by wage increases and the negative impact of an appreciating currency, India outsourcing giant Tata Consultancy Services (TCS) delivered impressive results in what it called a volatile quarter.

TCS (VARBusiness500 rank: 32), India's largest IT services organization, reported a 55 percent increase in earnings to $291 million on a 42 percent increase in sales to $1.3 billion for its first fiscal quarter ended June 30 compared with the similar quarter one year ago. TCS said it was able to maintain net margins through cost management, productivity increases and hedging gains.

TCS' strong showing comes with outsourcing rivals like EDS and Computer Sciences Corp. (CSC) expected to post single digit sales growth for the similar quarter. For example, EDS is expected to post a four percent increase in sales to $5.41 billion compared with $5.19 billion, according to a survey of analysts by Thomson First Call. CSC, meanwhile, is expected to post a 5 percent increase in sales to $3.76 billion compared with $3.55 billion in the year ago quarter, according to a survey of analysts by Thomson First Call.

At least at this point, TCS is not seeing a sales falloff in the wake of concerns that outsourcing is becoming more costly (witness the rising salaries of offshore workers)more difficult to sustain (language barriers are often at the root of that problem).

"Over the last two to three years, there has been a tendency among U.S. corporations to see the value of outsourcing, especially to destinations like India," says Pradipta Bagchi, spokesman for TCS.

In fact, seven out of 10 of companies on the Fortune 100 use TCS for some type of outsourced service, whether that's for business process outsourcing (BPO), infrastructure services or consulting. The reasons for the integrator's popularity Bagchi explains, is threefold: global expansion, increasing Indian labor force and cost.

In the last quarter, the company opened its Mexico Global Development Center; TCS has more than 150 clients and in excess of than 5,000 professionals in 14 Latin American countries. The center is strategic for furthering its success in the United States as well as for forging new markets in Mexico and Latin America.

"Our centers in Latin America speak Spanish and Portuguese," says Bagchi, "and our new center in Mexico serves not only that country but also U.S. businesses that have a need for Spanish-language services. It can also serve as a 'near-shore' center for U.S. companies because of its English capabilities, and it is in a more favorable time zone than our centers in India." Companies have made it clear that while it is advantageous to have some work done during the overnight hours in the U.S. "

That high demand continues to fuel the attractiveness of engineering degrees in India. "Countries are not finding the number of technically skilled employees in their own home," says Bagchi. "[India] will have 400,000 engineering graduates this year."

Acknowledging that salaries are on an up-tick, Bagchi says many businesses are moving out of Bangalore, for example, and into "tier two" cities.

"The economic boom in India has led to the growth of airlines within the country," he says. "So it is feasible to fly into and out of these towns now where it wasn't possible before." These towns are not as developed as the larger cities and salaries are not as competitive.

For Tata, the challenge for the future will be in continuing to attract talent while keeping the value proposition attractive to customers. That may take a bit of globetrotting for Tata and other outsourcing firms, as they continually seek low-cost labor to meet high-tech needs.