European Market Gets Worse for Indian Outsourcers

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Europe has always been a difficult market for Indian outsourcers, because some of the countries on the continent have been slow to adopt offshore outsourcing. The market has however worsened this year for the Indians because of a weak euro and tighter IT budgets in Europe, according to Forrester Research.

Large Indian outsourcers currently earn less than 30 percent of their revenue in Europe. The figure is far lower if the U.K., which has been faster in adopting offshore outsourcing, is excluded. The U.K. accounted for 16.2 percent of the revenue of Tata Consultancy Services (TCS), India's largest outsourcer, in the Indian fiscal year to March 31, 2010. The share of its revenue from the rest of Europe was far lower at 10.5 percent.

In some countries in Europe, the labor laws set limits on what can be outsourced by companies, Siddharth Pai, a partner at outsourcing consultancy Technology Partners International (TPI), said on Tuesday.

Cultural and language differences, and discomfort with sending work far away, have also made many European companies avoid offshoring to India, Pai said. These companies would prefer to outsource to European services firms like Capgemini and T-Systems, or to large multinational services companies like IBM and Accenture that have large operations in Europe, he said.

The ongoing debt crisis in Europe, and its impact on the euro and the economy, may now make the continent less interesting for Indian outsourcers, said Sudin Apte, principal analyst at Forrester. Indian outsourcers realize that their margins in Europe will be far lower, so they are looking only at some select deals, he said.

A large number of Indian outsourcers are shifting their focus back to the U.S., their largest market, where business has started to pick up, Apte said. During the recession in the U.S., they had tried to diversify their markets to other countries, including in Europe.

The European market for corporate IT products and services fell by 6.3 percent in 2009, when measured in euros, according to Forrester. The recovery in the European IT market is likely to be slow this year with the IT market growing at 4 percent over last year, which means that European firms will continue to face budget cuts in 2010 and possibly even beyond, Forrester said.

The debt crisis could have a longer-term effect on IT spending in Europe as public-sector organizations try to balance budgets and shed debt, activities that would in turn have an effect on private businesses by a "ripple effect," Gartner said this month.

Offshore outsourcing business from Europe has slowed down after the debt crisis, according to TPI's Pai. Even some deals that seemed close to closure 18 months ago are now delayed, he added.

Indian outsourcers that are targeting European IT markets are also hit by the falling value of the euro, Apte said. Between Jan. 1 to June 30 this year the euro depreciated by over 15 percent against the Indian Rupee, which meant that there were fewer rupees available to outsourcers to meet costs in India.

Although a number of Indian outsourcers have set up services delivery operations in Europe, their main services delivery, and hence the key component of cost, is still from India, Apte said.

Costs in India are going up, as salaries have moved up because of renewed demand for staff from Indian outsourcers and subsidiaries of multinational services companies. Some of these companies had reduced hiring and even cut staff after the recession in the U.S. hit offshore business. Companies have started hiring again, and staff attrition is likely to go up to over 15 percent in the current quarter, Apte said.

The European market is likely to continue to be difficult for some time with companies cutting IT budgets, and resisting increases in services rates, Apte said. Some large customers are in fact trying to negotiate reduced rates, but Indian vendors will be able to reduce rates by a maximum of 2 percent, he said.

Vendors will have to start looking at options such as standard services, benefits of scale, and engagements that have a larger component of reusable code, in order to offer lower costs to European clients, Apte said.

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