When it comes to outsourcing suppliers, there are two types of company at present: offshore outsourcers, and the rest. In terms of growth, and investor expectations, the two are far apart.
In the latest quarters, the three big Indian suppliers of offshore outsourcing services – Tata Consultancy Services, Wipro and Infosys, all produced what looked, at first glance, like yet another set of spectacular results, confirming that ‘offshoring’ continues to be very economically attractive to their clients.
Tata, the largest Indian outsourcing company, for example, announced revenues up 26% to 25.8 billion rupees ($590m) and net profits of 4.7 billion rupees ($107.8m), flat on the same quarter a year ago. (These results are based on US accounting principles, and are different to the Indian accounting standard figures).
For the year, Tata became the first Indian IT company to pass the $2 billion mark in revenues, with sales up 37% from $1.6 billion. The company, which floated on the Mumbai exchange in 2004, said it signed 53 new clients in the quarter.
Tata also demonstrated that offshore does not mean Asia: it now has four centres in China, two in Brazil, three in Uruguay and one in Hungary. It now has 45,700 employees.
Those are good growth and profit margins, but still fell far short of expectations. This has triggered a debate about the long-term prospects of offshore companies. The main problem is that Tata is paying higher wages, which is eating into profits and could undermine the business model.
One of Tata’s big rivals, Infosys, announced sales up nearly 50% to 19.87 billion rupees ($455m) for its fourth quarter, with profits up 67% million to 5.67 billion rupees ($127m). But in spite of this performance, Infosys warned of a slowdown, citing tougher regulatory requirements in the US (aimed at fraud reduction and privacy, not against offshoring). These regulatory and wage pressures have always been cited as threats to the offshore business model, but analysts are not unduly concerned.
Wipro, the third big outsourcer, also reported strong fourth quarter growth, with sales of 23 billion rupees ($525m), up 30%. Net profits rose 35% to 4.5 billion rupees ($102m). Like the others, Wipro said it was pushing into higher margin areas of business, such as business process outsourcing, to counter any threat to margins.
Now to the West. The biggest global services company, by far, is IBM. Services account for just over half of IBM’s total revenues, so when this business stumbles, the whole of Wall Street gets nervous. For its first quarter, IBM reported sales up just 3%, to $22.9 billion, but without the benefit of favourable exchange rates, growth would have been just 1%. Profits were $1.4 billion, up slightly from the quarter a year ago. This figure was below IBM’s usually accurate earnings guidance and sent the whole market tumbling.
IBM blamed its problems squarely on its services business, particularly in Europe, which grew by only 6%, much slower than of late, although its mainframe business also slowed, due to product cycles. IBM is trying to move to smaller, higher margin services and to cut costs, but this is proving costly. Some Wall Street analysts think IBM’s problems signal a wider, industry malaise. “The drop off in March was breath-taking in scope and suddenness,” said one Morgan Stanley analyst.
IBM’s close rival in services, Accenture, came in with a more respectable set of figures, with sales up 15% to $4.2 billion for its second quarter. Net profits jumped from $123 million to $210 million. But there were some dark clouds: Its margins also fell, and it revealed a $24 million loss on its high-profile UK National Health Service contracts, which are running behind schedule.
CEO William Green did not seem unduly concerned: “This is a terrific assignment. We could not be more pleased to be on it. When you take on something of this magnitude, you’re going to have bumps along the way.” Accenture’s two NHS contracts are worth around $2 billion.
One other result stands out this month: In spite of growing concerns about competition and its proprietary business model, Research in Motion (RIM), the company behind the popular BlackBerry email reading device, continues to report hectic growth. In its fourth quarter to February 2005, sales grew by 92% to $210.6 million. Its small loss of $2.6 million, against a $41 million profit in same quarter a year earlier was due to a patent infringement lawsuit.
Some industry analysts have expressed concerns that major telecoms operators, such as Vodafone of the UK, are preparing competitive services that do not use RIM products or services. But RIM says demand remains strong: BlackBerry user numbers grew 470,000 in the quarter, and now stand at 2.51 million globally.
On the theme of berries, router manufacturer Juniper Networks also stands out. Sales of its high-end J-series routers and its NetScreen security products helped to drive the company’s sales up by 100% to $449 million, with profits more than doubling to $75 million. Juniper’s high stock price and mounting cashpile is enabling it to compete against Cisco for acquisitions, buying two Silicon valley start-ups, Peribit Networks Inc and Redline Networks Inc, for a total of $469 million this quarter, extending the range of products aimed at enterprise customers.