Outsourcing slowdown-Point -Counterpoint

Consulting firm TPI came out with an interesting set of statistics today ,that build on the outsourcing backlash theory. According to TPI the first quarter of 2007 has started with softening of IT outsourcing awards .

Contracts more than $ 50 million in the US has come down in number and value terms as compared to quarter one of 2006. The 27 contracts awarded in the Americas during the first quarter represented the lowest awards since 2001.According to TPI the trend in the Americas mirror a global slowdown . In this quarter 68 outsourcing contracts (more than USD 50 million) were awarded down from the 99 deal in quarter one of 2006.In addition to this the Total Contract Value (TCV) in this quarter was the lowest seen in any first quarter in the past five years , with the value of deals getting smaller in yearly USD terms . However the good news according to TPI is despite a slow start the overall projections of do show a modest growth in the annualized revenues for 2007 , as compared to the last year .

Implications for the Indian IT Industry

As I had reported earlier , the Indian IT industry is buoyant about its prospects and none of our leaders see outsourcing softening in the near term. However if the data that TPI presents is true , the implications on the industry , the stock market and the Indian economy is pretty severe and according to me they as follows :

a) Deals greater than USD 50 million are extremely important for the survival of the Indian IT sector ,the reason being , that these are multi year contracts and provide the stability and growth of the industry . One could infer that reduction in these deals would mean that organizations are engaging in shorter-term deals with smaller contract values because they want best-of-breed solutions,” and TPI Managing Director Peter Allen says.....“We are advising our clients to strive to align their sourcing needs with their business strategies and to consider the maturity of the service provider marketplace.” This is a pretty significant change in the customer mindset , implying :

1. Need to start ramping up best of breed solutions (an area which is probably the greatest weakness of our industry...) , we have focused on scale and cost for too long and if the sudden shift happens from scale to IP lead solutions it might affect our ability to deliver and consequently revenue streams .

2. Global Delivery is not about delivering from multiple Indian locations a point I made in my post of 9 April , time to market and providing efficiencies (other than cost arbitrage is also important ..) . Infosys recently announced its multi million dollar expansion plan in Mexico which is a step in the right direction , but is Infosys a rare exception in creating a truly global delivery model ??

b) The Indian stock market as we are aware has a high weightage of the IT sector , an under performing IT sector would be disastrous for the economy as a whole and the Resurgent India story can come to a grinding halt.

As an Indian I hope things would improve from the next quarter and the confidence of the Murthy's , and the Ramadorai's of the world is reflected in the next quarters results ....and Alan Binder is proven wrong ......watch this space ....I am going to track this story as well ........