Doomsday spell on BPOs?

As more the stock markets go through the down slide of the roll a coaster reflecting Wall Street’s 2008 collapse, threatening a global financial and economic down slide. Top analysts opine that the spell could reflect on the IT and the ITeS sectors in India. This was reaffirmed by John McCarthy, vice president and principal analyst with US research firm Forrester. In their own survey shows that Indian IT providers should prepare of the slower growth and lower profits.

The belief that “An economic slowdown is benefiting and subsequent cost cutting will reflect in higher off shoring”. This concept no longer works as a reconstructing of financial services is taking place. However the financial services sector part of off-shoring is currently over staffed. Mergers and acquisitions and conversion of large investment banks into commercial banks may be the out come of the situation. This would mean fewer employees, fewer vendors, and less extravagant IT budgets. Since financial service providers are the most aggressive buyers of technology and BPO services, they may be hit towards a downward trend, the cost of nearly 25% of their revenue.

Our Indian IT vendors contribute to financial services that are almost twice that of their global counter parts as a percentage of the revenue. The overwhelming statistics will definitely have a huge impact on Indian companies. The margins will continue to drift down to 20% and the pressure will be at the topline. This time the slowdown needs to be dwelt with presence of global vendors like Accenture and IBM who have magnifies strength from 2000-3000 employees to 60,000-70,000.

Nearly two-thirds of the global IT business originates from the US. Over 40% of the global IT revenues flow from the financial sector. IT companies will be badly hurt with financial giants like Lehman Brothers and Merill Lynch literally shutting down. The bulk of the exports earnings of the IT-ITeS sector is over $40 billion for 2007-08 is from US, which accounts for a whopping for 60% of the business for the Indian IT sector. Another 20% comes from Europe and the rest from Asia Pacific.

Indian IT companies spend 4-6% of their revenues on sales and marketing. Mergers and acquisitions are happening in the US financial space. These financial giants are bound to visit their existing outsourcing contracts. Revenues are bound to shrink, the $40b exports from India projected for 2008 looks doubtful. Job losses could be as high as 25,000 in IT and ITeS sectors. Accoring to Forrester, more than 40% of the large businesses have cut their IT budgets.

BFSI remains the largest vertical market of Indian IT-BPO sector (40.4% in 2008), other verticals such as manufacturing, retail, transport, utlity continue to keep traction. The revenue streams of IT/BPO companies India according to Nasscom are as follows,

  • BFSI (Banking/Finance): 40.4%
  • Hi-tech/telecom: 19%
  • Manufacturing: 15%
  • Retail: 8%
  • Airlines and transportation: 3.4%
  • Construction and utlities: 3.5%
  • Healthcare: 2.5%
  • Media, publishing and entertainment: 3.3%
  • Others: 4.7%

Non-discretionary spends, which are about 70% and include time and material cost, will continue as firms outsource ITeS/BPO services in areas such as accounting, HR and logistics.

Relatively the whole impact will reflect on Indian Stock Market, Real Estate, Finances and Economy of the country.

October 2008

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