The Slow Demise of Offshore Outsourcing

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Outsourcing contributes to a large chunk of export revenue in developing countries. Mainly India, in the past, has benefited from an offshore outsourcing boom. But now there may be several reasons for that chapter of outsourcing to close. Macro-economic factors combined with renewed competition from US based outsourcing companies may see a large chunk of revenue that would’ve gone to Indian based companies, to stay home in the US. Let’s take a look at why this is happening.

Infosys ) went on a tailspin earlier in the month. India’s second largest outsourcing company posted that revenue rose 22% year on year to 98.58 billion INR whereas analysts estimates were at 99.51 billion rupees. Net income rose 24% to 23.69 billion, while Wall Street was expecting 23.71 billion rupees, but another cut in earnings forecast didn’t leave investors too pleased. Earnings have been estimated at 160.61 rupees to a share as opposed to 166.46 rupees a share earlier, thanks to a weaker dollar vis-à-vis the rupee. Another hurdle that the company faces was the fact that there was a significant slowdown from China and the company also stated that Q3 visibility was limited and clients weren’t enthusiastic on committing.

One of the positives however, one should note is that underlying volumes rose by 4% when compared to the previous quarter, which suggests that Infosys is gaining some lost share. Another positive for the company is the integration of Switzerland based Lodestone Holding AG, which should bump up revenues from Europe to near the 40% mark.

Another company from India that provides outsourcing solutions is Wipro (NYSE: WIT) which is a provider of IT, which began in 1945 as a maker of vegetable oils. In August, HSBC securities upgraded Wipro from Neutral to Overweight. The last time Wipro Limited reported earnings, it reported a sales rise of more than 24% from a year earlier and 8% from the previous quarter to 106.20 billion rupees and a net profit rise of more than 18% to 15.80 billion rupees but the company also noted seeing uncertainty and delays in deal closures, however, it should be noted that its pipeline is quite impressive.

One of the challenges that are ahead for Wipro and Infosys, not including the ones already mentioned is the fact that wage inflation is happening in India. Inflation as a whole is fairly rampant in the country and this is bound to have an impact on wages, whereas wages in the west continue to stagnate due to lack of jobs and an uncertain economic climate. Back in July, Wipro Limited announced that it had raised wages for its employees in India by 8% and for its overseas employees by 2% to 3% at the mid year mark.

This could be one of the problems that Indian based companies will face as they may lose their competitive edge with regards to lower costs. Indeed, this may force most of these companies into providing a lot more innovative solutions due to the fact that its cost advantage is lost. This kind of competition may be a good thing for these companies.

Now let’s take a look at iGATE Corporation ) which is a US based corporation that provides information technology solutions, consulting and BPO services. iGATE Corporation recently reported a 2% revenue increase to $271.1 million and a net income rise from $7.4 million to $20.8 million. However the company also said that visibility is cloudy and that they had recently dropped a “relatively large” client. iGate corporation recently acquired Indian outsourcing firm Patni Computer Systems but the benefits of that deal are yet to be seen.

Another US based provider of IT and KPO solutions, Syntel ) seems to be doing better than its counter parts. Back in July, Syntel reported a 14% revenue rise to $179.0 million along with a net income surge of 57% to $43.4 million thanks in part to currency gains and growth in its applications outsourcing business.

With a volatile currency exchange and a weakened dollar at the moment, you’d imagine that a lot of US firms wouldn’t be too thrilled to send their outsourcing abroad. The economic situation in the US demands the current exchange rate in order to boost economic activity in the country. Similarly, the inflation in developing countries is a fall out from the stimulus packages that were introduced in the aftermath of the late 2000s recession. Combine the exchange rate with the fact that wage inflation seems to be increasing in India when compared to the West, you’d have to currently put your money on US based companies in the outsourcing sector to be really making headway in the outsourcing sector.

ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus