Outsourcing bandwagon breaks down, fails to keep date

by CXOtoday Correspondent    Sep 09, 2003

MUMBAI: Early 2003 saw an excited buzz moving around industry circles, with several fortune 500 companies looking to outsource their complete IT requirements to India. The combined revenues expected to flow into the country were estimated to be between $1.2bn and $1.5bn. News of multi-million dollar contracts were doing the rounds with great aplomb.

Nine months later the deals seem to have fizzled out. According to Avinash Vashistha of outsourcing consulting company NeoIT, the primary reason for the fallout is because many companies have dropped their outsourcing plans or have decided to outsource only a very small portion of their businesses.

Reportedly, companies like Pepsi Foods, General Motors, British Petroleum, Agilent Technologies, Delta Airlines, ABN Amro, Motorola, Sprint and others were looking at outsourcing to India earlier this year. Many of these companies are facing stiff opposition from local labor unions because of their outsourcing plans. Another reason is they have not been able to find vendors capable of handling such large transition of processes or projects, according to Mr Vashistha.

Among specific reasons in the industry, Pepsi Foods is said to have dropped its plans for outsourcing to Indian vendors since the company has been unable to reach a decision. General Motors has decided to outsource only small projects and split it among 3-4 different vendors. British Petroleum has also followed suit. Agilent Technologies, which was looking at an outsourcing deal of $30-40m, has now slashed its project size by one-third.

However, there is respite for BPOs. Motorola has outsourced a large SAP application aggregating nearly $100m spread over five years to L&T Infotech. It too was scheduled to outsource a sizeable chunk of its finance and accounts IT application to a single vendor. US telecom majors Sprint, AT&T and Verizon have not closed all their options. Others like JP Morgan, American Express and ABN Amro have decided to set up captive centres.

According to Sudhakar Ram, founder and CEO of Mastek, the really large outsourcing deals will materialize next year, ‘04-05, when a portion of the outsourcing backlash is wiped clean.

Cash on the balance sheet is an extremely vital aspect for clinching deals, which is why companies like Infosys are preserving their cash. This is the major reason why TCS has gone public, as it needs an independent balance sheet that customers can trust.

According to a BPO thumb rule, foreign companies will not normally outsource work that will need more than 10% of the existing manpower of the vendor company. This implies that Infosys with a current strength of 17,000 people can hope to successfully capture projects involving not more than 1,700 people, which is nearly $40-50m in terms of value. TCS with nearly 25,000 people can bid for deals worth $80-120m.

The large outsourcing deals also require an increase in workforce capacity. Overall, it can be said that the BPO bandwagon though slow and slack on its promise, will inch its way home in the coming year.