India the Land of Service Outsourcing


Tata Consultancy Services (TCS) Limited is a world-leading information technology company, engaged in consulting, services, and business process outsourcing. It envisioned and pioneered the adoption of the flexible global business practices that today enable companies to operate more efficiently and produce more value. Established in 1968 as a division of Tata Sons, it took the decision to go public in 2004.

Tata Sons is the promoter company of the Tata Group. The Tata Group has worldwide revenues of $14.25 Billion from 80 companies in 7 sectors: Engineering, Materials, Energy, Chemicals, Consumer Products, Services, and Communication and Information Systems. Established as a trading company by Jamsetji Tata in 1868, it evolved into the custodian of the Tata companies that were to follow. It was the promoter of all key companies of the Tata Group for nearly a hundred years, till the role of promoting new ventures was taken over by Tata Industries in the 1980s. Tata Industries was set up in 1945 as a managing agency for businesses promoted by Tata Sons.

Tata Consultancy Services had revenues of $1.56 billion in FY2004 ending March 31, 2004. TCS employs 36,000 associates in nearly 150 offices in 32 countries. The firm has 490 current clients including 7 of the US Fortune top ten companies. It added 52 clients in the last quarter. Five clients provided revenue over $50 million. The top client (GE) accounted for 5.1%, the top five for 21.2% and the top 10 for 33.6% of total revenue. The firm has had CAGR in revenues of 32.6% over the last four years and 27.5% in net income.

Recent operating results are highlighted by the fact that the firm had half year revenue in excess of US$1 billion. For the quarter ending September 30th revenue of ~US $540 million was up by 43.58 % YoY and 13.93 % QoQ. Net income excluding exceptional items at $128 million was up by 52% YoY and 14% QoQ. During the quarter the company added 52 clients. The firm also had a net addition of 3,974 employees so that the total number reached 40,948.

Figure 2 TCS Annual Revenue

Revenue breakdown by geography has been consistent over the last three with America around 62%, Europe around 20%, and India around 13%.

Figure 3 TCS 2Q FY05 Revenue by Geography

Figure 4 TCS Revenue Segmentation 2Q FY05

Infosys Technologies Ltd is a leading global technology services firm founded in 1981. Infosys provides end-to-end business solutions that leverage technology for its clients across the entire software life cycle: consulting, design, development, re-engineering, maintenance, system integration, package evaluation and implementation. In addition, Infosys offers software products to the banking industry, as well as business process management services through its majority-owned subsidiary, Progeon.

Figure 5 Revenue Breakdown by Geographic Sector

Revenue for fiscal years 2002, 2003 and 2004 ending March 31 were $545 million, $754 million and $1,062 million respectively. Net income for the same fiscal years was $165 million, $195 million and $270 million respectively. Over the last five years Infosys has racked up CAGR of 55% in both revenue and net income. Net income as a percent of income has fallen from 30.2% in FY2000 to 25.4% in FY2004. Revenue for the first half of fiscal 2005 was $714 million. Revenues for fiscal 2005 are anticipated to be around $1.55 billion, a growth rate of over 45%. In the last reported quarter Infosys hired 5,010 employees bring its headcount to nearly 33,000.

Figure 6 Revenue Breakdown by Geographic Sectors

The revenue split by geography has been relatively constant with North America at 72%, Europe at 19%, India at 1% and ROW at 8%.

Figure 7 Revenue Segmentation by Client Industry

Wipro Limited was incorporated in 1945 as Western India Vegetable Products Limited. Wipro Limited was initially engaged in the manufacture of hydrogenated vegetable oil. Over the years, the company has diversified into the areas of Information Technology or IT services, IT products and Consumer Care and Lighting Products. The Consumer Care and Lighting segment manufactures, distributes and sells soaps, toiletries, lighting products and hydrogenated cooking oils for the Indian market. The firm is headquartered in Bangalore, India and has operations in North America, Europe and Asia. In 2002, the company acquired Spectramind to facilitate its entry into the BPO business and the Global Energy Practice of American Management Systems to augment its IT consulting expertise in the energy and utilities sector. In May 2003, Wipro acquired Nervewire, Inc to enhance its IT consulting capabilities in the financial services sector.

The Company has three principal business segments. The Global IT Services and Products segment provides research and development services for hardware and software design to technology and telecommunication companies, software application development services to corporate enterprises and business process outsourcing (BPO) services to global corporations. The India and AsiaPac IT Services and Products segment focuses primarily on addressing the IT and electronic commerce requirements of companies in India, the Middle East and the Asia-Pacific region. In FY 2004 Global IT accounted for 74% of total revenue, while India/AsiaPac accounted for 16%.

Figure 8 Wipro Limited Revenue by Geographic Sectors FY 2002 thru FY 2004

In FY 2004 the US accounted for 53% of total revenue, India 25%, Europe 18% and ROW 4%. There were 44 customers generating revenue more than $5 million, 19 with revenue between $1 million and $3 million and 74 contributing more than $1 million. There were 339 clients in total.

Figure 9 Wipro Revenue by Vertical Application Segments

Comment

First, not all outsourcing is offshoring. Firms like IBM, EDS and Accenture have had major outsourcing businesses for a long time. Press announcements on contract signings speak of acquisition of facilities, equipment and personnel from their clients. Second, not all offshoring is outsourcing. Many companies establish a presence in geographies to better serve the local or regional clients. For example, Japanese auto companies have set up large manufacturing facilities in the United States. Third, many, arguably most, jobs are simply lost to productivity improvements, a combination of technology and best practices. Voice mail, email, online shopping and customer service have changed the way we live our professional and personal lives and eliminated many jobs.

Still it can not be denied that a considerable and growing amount of outsourcing involves the loss of US jobs by offshoring to locations that offer very favorable wage differentials. If a firm wants to move its manufacturing operations overseas, a considerable investment must be made in plant and equipment. Efficient logistic operations must be set up for both suppliers and customers. If a company transfers its manufacturing operations to an existing outsource firm, there is considerably less risk and upfront capital expenditure. A foreign outsourcing firm can amortize its investment across multiple clients and use the wage differential to provide profit as well as cost reductions to clients. The value proposition for customers is that they can concentrate on their own core competencies and thereby become more competitive.

When a firm wishes to outsource a service such IT, human resources, debt collection or call center, far less investment is required. Inexpensive and widely available telecommunications bandwidth, enable businesses to hand over more white-collar work to specialist outside suppliers, in the same way as manufacturers have been doing. VoIP will also help lower communication costs. Occupations like medical transcriptions, radiology interpretations, software programming, and business process operations are already being impacted. In fact any service that does not require face to face meetings, any service that can be performed via the phone or internet is at risk for offshore outsourcing.

The theory is that firms that outsource will become more competitive, more profitable and thus able to invest in areas that will create jobs for the 21st century. Unfortunately, the theory does not say what those jobs will be or how quickly this will happen. The transitions from an agrarian society to a manufacturing economy and from manufacturing age to the information age were neither quick nor smooth. We are now in a shift from a goods-producing to a service-providing economy.

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