It was seen coming for some time Yet its scale and scope shook by decree


									 Cover Story

The Meltdown
It was seen coming for some time. Yet its scale and scope shook
everyone. As the Wall Street came down like a pack of cards, it
made even the hardest of optimists admit to the slowdown

16 | October 15, 2008                  DATAQUEST | | A CyberMedia Publication
           he meltdown which has                 Views are abundant, but there is     the basic level the revenue from these
           brought the US economy            consensus on one big thing: that In-     customers will take a direct hit. And
           to the brink of recession,        dia cannot remain unaffected. “We        further, as many more financial insti-
           has made vulnerable the           do see these incidents having a direct   tutions shall come under the axe, it
Indian outsourcing industry’s biggest        impact on our industry, and those        will have a spiraling impact on rev-
market—the US. And of course, fi-            likely to create a downstream impact     enue.
nancial services is the largest market       on other sectors of the US economy          At a broader level, the Indian IT
among verticals. As the undercur-            and worldwide markets,” says a state-    and BPO industry is bracing for a
rents are being felt in Europe and the       ment issued by Nasscom.                  slower growth as new projects will
crisis percolates down to other sec-             More specifically, many of the fi-   take a hit and there will be slowdown
tors as well, the question is imminent:      nancial institutions that have gone      in IT spending at least over the next
Is this the end of the golden age of         down (bankrupt or acquired) have         few quarters. Earlier this year, Nass-
outsourcing for India, as a Forrester        multiple vendors, including many         com had moderated the growth rate
analyst pointed out?                         tier-1 vendors, servicing them. At       estimated for this year to 21-24%

DATAQUEST | | A CyberMedia Publication                                                      October 15, 2008 | 17
 Cover Story

factoring in the subprime crisis. How-    pany’s hiring plans have slowed down       outsourcing has definitely taken a hit.
ever, factoring in the recent global      and the percentage of just-in-time or      India being the largest, vis-à-vis the
meltdown, the growth rate is likely to    reactive hiring to the total hiring has    other outsourcing destinations, also
end up even lower, though Nasscom         increased. NIIT Technologies too           means that it is going to be the most
has not revised its growth projection     has confirmed cautiousness in terms        impacted. Within that it’s the compa-
yet. According to Phaneesh Murthy,        of hiring. The company has stopped         nies with bigger exposure to the BFSI
CEO, iGate, “Since financial services     hiring to the bench resorting to only      sector and the US market that have
account for 40% of India’s technol-       ‘just-in-time’ hiring.                     already started feeling the heat.
ogy and operations in the IT export           All this could result in a lowering        According to Nasscom, the BFSI
revenue, I anticipate slower growth in    of IT industry growth by six to seven      sector accounts for 30-40% of the
the next two years or so.”                percentage points and a lowering of        work happening in the Indian IT-
                                          new job creation to about 200,000          BPO industry. This indicates a high
The HR Crisis                             in the current year. According to          exposure to the sector. For many
Another area that will take a big hit     Thakker, most vendors will continue        tier-1 companies, including some
is hiring, considering that manpower      to focus on optimizing their resourc-      of the top 10 software and services
is one of the biggest cost factors. In-   ing and staffing to minimize bench         companies, on an average 30-40% of
dustry experts estimated a 25-30%         time and maximize utilization.             revenue is contributed by financial
drop in hiring as companies get into                                                 services. Then there are companies
a cost saving mode. According to Business Impact                                     like Polaris and i-Flex which have a
Ganesh Natarajan, Global CEO, Zen- In some ways, the Indian IT and BPO               major portion of their business com-
sar Technologies, there will be a slow- industry is at the same stage today          ing from the BFSI space. Then there
down for three to                                           as the slowdown in       are the smaller players, especially in
four quarters while                                         2001-2003. Though,       the KPO domain, that are solely ca-
the global financial                                        in others it could       tering to the financial services sec-
sector corrects itself                                      be much worse this       tor. Geographically too, even though
and the impact on                                           time. For one, this      the companies have been diversifying
other sectors is ad-                                        has hit the Indian IT    their operations over the years, a ma-
dressed. According                                          and BPO industry         jor portion of the business continues
to Rishi Das, co-                                           close on the heels of    to come from the US. With many
founder, CareerNet                                          the rupee apprecia-      companies the exposure could even
Consulting, there is                                        tion crisis. This was    be more than 50%.
likely to be a 30-40%                                       at the time when
drop in hiring at the                                       the industry was just    The Specifics
Indian       campuses                                       reeling out of the ru-   In order to gauge the impact of what
this year, especially                                       pee appreciation cri-    is soon turning out to be a global fi-
the IITs. “Even the                                         sis and had not fully    nancial crisis, as a starting point it will
IITs are feeling the “In the short-term                     recovered yet. The       be apt to understand the specific ven-
heat. In fact, they vendors will continue slowdown,                         there-   dors that have been impacted with
are likely to be more                                       fore, adds cumula-       the axe falling on their customers.
affected than the to get the same                           tively to it. Further,       “The meltdown has meant that
smaller institutes as growth rate”                          the US sub-prime         some of the larger clients that were
the companies may                                           crisis, spiraling into   being serviced by various offshore
resort to hiring from —Sumeet Salwan, director, advisory    a credit crisis has      players have actually either been ac-
                        services NeoIT
smaller campuses for                                        shaken up the very       quired or have gone bankrupt, and
cost savings,” he adds.                 foundations of the financial industry,       as a result their business is in itself
    Manpower is one the biggest cost and is already being termed as the              in doubt,” says Keshav Murugesh of
factors in the knowledge industry. worst financial crisis since the ‘Great           Syntel. Since these were large players
Therefore, most of the companies Depression’ of the 1930s. In a scenario             like Bear stearns, Lehman, Washing-
are planning to wait out till next year like this it takes some time before the      ton Mutual, Wachovia, Fortis, etc it
and analyze the situation before they fundamentals are back in place.                has brought in a lot of uncertainty
start aggressive hiring again from         Notwithstanding the fact that cut         to players exposed to them. Accord-
campuses.                               in IT budgets would also mean more           ing to GB Prabhat, Founder & CEO,
    Murthy confirmed that his com- outsourcing at some stage, Indian                 Anantara Solutions, the disappear-

18 | October 15, 2008                                                       DATAQUEST | | A CyberMedia Publication
ance of prominent US firms implies          that have gone down also have their        This will have a broader impact
the disappearance of an equivalent          offshore captive centers in India,      on the dynamics of the horizontal
volume of business.                         which are now up for grabs.”            service offerings. Though application
    So, which are these offshore play-                                              development and maintenance and
ers that have exposure to some of the       The Broader Picture                     support kind of work will continue,
big financial names that have come          The crisis though isn’t going to be it is the areas of new technologies
down? As per sources, Satyam, Patni,        restricted to the vendors exposed and migration technologies that will
IBM, Perot Systems, and TCS were            to these companies alone. The heat take a hit as companies get more risk
among the vendors servicing Merrill         will be felt across the industry as the averse. “There will definitely be some
Lynch, which was taken over by Bank         crisis leads to an                                      impact on the way
Of America. Since TCS is a vendor           overall slowdown                                        organizations       look
for both Merrill Lynch and Bank of          in IT spends. Over-                                     at their IT budgets.
America, being there in the camp of         all, the market                                         Though new initia-
the acquirer, the takeover of Merrill       will don a more                                         tives may be stalled,
Lynch may not directly impact TCS.          conservative ap-                                        basic IT services such
    Lehman Brothers, the investment         proach toward any                                       as support functions
bank that filed for bankruptcy is           spending, includ-                                       will continue to be
speculated to be serviced by TCS and        ing IT spending,                                        outsourced due to
Wipro among other vendors. Simi-            as the companies                                        the cost advantages,”
larly, Washington Mutual, which has         want to wait and                                        concurs Anil Kumar,
been taken over by JP Morgan Chase          watch what’s going                                      CEO & co-founder,
will bring Wipro and Cognizant un-          to happen to the                                        Quinnox. According
der pressure. On the other hand, US         business. “When                                         to Natarajan, consult-
banking giant Wachovia, which also          the whole industry “Many US                             ing and SI may be a
crumbled under the weight of bad            is in turmoil, com-                                     little slow in the short
mortgage loans, has been outsourcing        panies become cau-
                                                                    companies are not               term.
work to Genpact. Its takeover deal is       tious and step back just outsourcing                        According to Vi-
yet to be finalized. AIG, which has         to think how and to Indian service                      ral Thakker, partner,
been nationalized with an $85 bn bail-      where to spend,”                                        practice lead, India,
out by Federal Reserve, is speculated       explains      Arvind
                                                                    providers but also              sourcing       advisory,
to be dealing with TCS among vari-          Thakur,        CEO, to global service                   KPMG, apart from
ous other vendors. In fact, most of the     NIIT Technolo- providers who are                        spending curbs at
tier-1 firms like TCS, Infosys, Wipro,      gies.                                                   large clients for dis-
and Satyam have had some exposure               Preliminary
                                                                    catering to them                cretionary      projects
with the names that have gone down          analysis of the cur- through their delivery there will also be un-
through their subsidiaries or in some       rent scenario in- centers in India”                     certainty caused by
form or the other. While the nature         dicates an impact                                       potential closure of
of the impact on tier-1 vendors will        on discretionary —Milan Sheth, partner, advisory        captive units due to
be more in terms of bottomline, the         spend on IT due services, Ernst & Young                 their parents’ bank-
impact on the tier-2 and tier-3 players     to the uncertainty                                      ruptcy/merger.
will be directly on the topline.            and customer decisions being post-         Some broader trends that are go-
    Milan Sheth, Partner, advisory          poned. According to Sumeet Salwan, ing to be in play, which the Indian
services, Ernst & Young, brings in yet      director, Advisory Services of NeoIT, IT and BPO companies will need to
another perspective to this: “A lot of      “In the short-term the vendors will brace up for over the next few quar-
the US companies are not just out-          continue to get the same growth rate. ters, include impact on the additional
sourcing to Indian service providers        While non-discretionary spend is work flowing in. As a result, com-
but also to the global service provid-      not going to get much impacted, the panies will be cautious in giving out
ers who are catering to them through        discretionary spend (on new tech- additional work. Also, due to high
their delivery centers in India. IBM        nologies and integration of new tech- volatility in the short term, Murthy
and HP-EDS are among the major              nologies) is going to be limited. Non- anticipates slower decision-making:
global vendors that service these           discretionary IT spend will typically “In the short term, there sometimes
companies out of their Indian cent-         include existing work, live projects tend to be delays in clients making
ers. Besides, some of the companies         and maintenance kind of work.”          the call, level of due-diligence go

DATAQUEST | | A CyberMedia Publication                                                      October 15, 2008 | 19
 Cover Story

up, number of approvals needed go the long term. According to Deepak               vor of the day. However, companies
up, etc. All this tends to stretch the Ghaisas, formerly CEO of i-Flex,            will need to be cautious as ultimately
sales cycle but the deals are still hap- “With the government having eq-           takeovers and mergers will mean one
pening,” explains Eddie Chandhok, uity they are going to have a say in             company outsourcing instead of two.
president, global delivery organiza- the decision making. With the gov-            As Salwan points out, two companies
tion, Infogain. Among the short-term ernment overseeing the whole thing            coming together doesn’t mean there’s
challenges will include slowdown in there might be a different approach            more work as there will be systems
the availability of funding.             to outsourcing and it may not happen      that will become redundant.
    According to Prashant Bhatt, as aggressively,” he explains.
CFO, Fractal Analytics, after all           However, overall, the sentiment is     The Others
these historical events ‘Lack of faith’ upbeat about the India value propo-        According to Kumar, the ripple effect
amongst the lenders and investors sition being strong enough to over-              of the financial sector turbulence has
will haunt the seg-                                     ride the storm in the      just started spilling to other industries
ment at-least in                                        long term. “We are         like retail, consumer goods, etc. The
the short to me-                                        at the same stage to-      widespread credit crunch and high
dium term.                                              day as the slowdown        rate of infrastructure borrowings may
    On the BPO                                          (dotcom bust) was in       see the effects of the slowdown spill
front specifically,                                     2001-2003. That was        over to aviation, leisure, tourism,
Sheth points out                                        followed by four to five   hospitality, and other such industries.
that a lot many                                         good years, as people      According to Thakur, CEO of NIIT
deals in the last five                                  realized that Indian       Technologies, in a situation of tight
years have been                                         IT could give quality      credit there will be impact on other
part of large trans-                                    service. Similarly, the    sectors of the economy. “It will be a
formation       con-                                    next couple of years       matter of time before the other world-
tracts. Since these                                     will be watershed years    wide markets get affected,” he adds.
will be on hold, it                                     for the industry where         According to Sachdev Ramakrish-
will impact new                                         more companies will        na, director, marketing, Steria India,
deals in the BPO “Since financial                       look for outsourcing       “There is a repercussion in the glo-
industry. Howev-                                        which will augur well      bal industry. This is like a Tsunami.
er, as there are no
                        services account                with India,” explains      You can see the waves affecting your
discretionary and for 40% of India’s                    Suresh      Sundaram,      shores and your environment. There
non-discretionary IT export revenue,                    vice president, corpo-     will be an impact on the other sectors
spends in the BPO                                       rate marketing, HCL        as well due to dependency on equity
industry and also
                        I anticipate slower             Technologies. Giving       and capital market.”
since most of the growth in the next                    the BPO perspective,           Murthy points out that any in-
ongoing contracts two years or so”                      Sandeep Aggarwal,          dustry which avails credit facilities
are multi-million                                       EVP, sales, solutions,     including real estate, high-end con-
dollar deals span- —Phaneesh Murthy, CEO, iGate         transition, Intelenet      sumer goods, etc, will be impacted
ning over a large                                        Global Services points    over the next year or so.
period, there is likely to be lesser im- out that while the credit crisis in the         Geographically, the impact is
pact as compared to the IT industry.     US is currently a cause for concern       gradually percolating to the Euro-
                                         for the Indian BPO industry, in the       pean market as well. One is already
Long-term Play                           long term the impact will be minimal      seeing consolidation activity becom-
In the longer term, due to consolida- as the industry’s fundamentals are           ing rampant among the European fi-
tion in the financial services sector, strong and the value proposition con-       nancial institutions. There are some
Murthy expects there to be ration- tinues to hold good.                            early signs of two financial companies
alization in total spend on technol-        Also, companies are foreseeing op-     in the UK going down. “The US im-
ogy and operations. Federal Reserve’s portunities with respect to more out-        pact is already percolating to Europe.
bail-out plan may seem like a good sourcing work coming to India owing             This slowdown will certainly hurt the
option to ride over smoothly in the to the greater focus on cost cutting.          India plans of the leading companies,”
short-term, but the nationalization They are also eyeing increased op-             says Thakker.
of the big financial institutions may portunity in terms of integration                                    —Shipra Malhotra
also put some curb on outsourcing in work, with takeovers being the fla-                  

20 | October 15, 2008                                                     DATAQUEST | | A CyberMedia Publication

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