IT services’ new mix

There is a new sense of urgency among many US and European IT services companies as they come to appreciate just how proven the offshore outsourcing model has become. Even as they ‘re-size’ their activities ‘onshore’, many traditional services companies, such as Cap Gemini Ernst &Young and BT, are rapidly building up their capabilities for handling IT projects and outsourced business processes through low-cost development and service teams in India, China and other so-called developing countries. And a sense of urgency is what is needed given the financial performances of companies that specialise in offshore outsourcing.

Offshore services leaders, such as Infosys Technologies, Cognizant, Tata, Satyam and Wipro, have all recorded phenomenal results in recent quarters as their cost models prove irresistible to IT directors in the West and as concerns about quality assurance and high-speed communications have evaporated. While their counterparts in Europe have been cutting headcount, these offshore specialists have been adding, on average, 1,000 workers a quarter. And they have been delivering the revenue growth profile to justify that.

In the closing quarter of its fiscal 2003, ending 31 March, Infosys reported revenues up a stunning 55% to $216.0 million, and net profits that rose to $53.1 million from $42.3 million in the fourth quarter of 2002.The company said it added 1,300 ‘Infoscions’ to its workforce of 14,000 during the quarter, and is predicting it will grow by between 25% and 28% in the coming year to attain revenues of between $946 million and $963 million. “The global delivery model has become mainstream as offshore outsourcing gains momentum,” says a triumphant Nandan Nilekani, CEO of Infosys.

Though reticent to publicise the identify of its clients, Infosys highlighted that it has completed the launch of a new client account analysis and reporting tool for one of the world’s largest private banking businesses, and that among the 28 customers in signed up in the quarter was the North American subsidiary of a global insurance broker, which engaged Infosys to develop policy management and premium account functions. Alongside it, Wireless telecoms company Nextel Partners has commissioned Infosys to test its new billing software.

Cognizant, too, is seeing phenomenal success, especially in the financial services sector. Revenues for its first quarter to the end of March soared 60% to $74.5 million, with 47% of that coming from services organisations. That helped improve profitability, with net income rising to $10.2 million from $7.1 million in the year-ago period. Contradicting perceptions that offshore outsourcing companies are fuelled solely by one-off contracts, Cognizant says that 80% of its business is now with customers who have been existing clients for over a year.

That profile is helping Cognizant win major recognition. Most notably, the investors’ bible Forbes magazine last month put the company at number 15 in its list of the 25 fastest-growing technology companies.

That does not suggest that there are no financial pressures on such companies. In India, for example, increasingly intense competition for contracts is squeezing margins. Financial analysts in the country suggest that billing rates, which currently stand at about $25 an hour for software developers at companies such as Wipro and Satyam, could fall as low as $10.

Those are economic pressures that Western companies that are relatively late into offshore outsourcing can – and possible need to – exploit. And Accenture is one case in point.

Net revenues at the world’s third largest IT services company fell 3% to $2.83 billion in the company’s second quarter to the end of March, although the strengthening of the euro against the dollar over the period meant that actually represented a 9% decrease in local currencies. Net income bounced back to $118.7 million, up from $10.6 million in the year-ago quarter when the company wrote off $211 million in failed dot-com investments.

Over the past two years, as customer demand patterns have changed, Accenture has been trying to scale down the proportion of revenue it derives from consulting and replace that with a larger contribution from outsourcing contracts. In the most recent quarter, outsourcing accounted for $828 million in net revenues, an increase of 33% over the revenues in the same quarter a year ago and now representing 29% of revenues.

Despite a 15% decline in business, the core consulting side of the business continues to contribute the lion’s share of revenues. The $2 billion from consulting in the second quarter amounted to 70% of the overall revenue pie.

Geographically, revenues in the Europe, Middle East and Africa (EMEA) region were up 2% to $2.62 billion, but down 13% when calculated in local currencies. Business in the Americas was down 9% to $2.74 billion – a 6% decline in local currencies. The Asia Pacific was flat at $397.9 million.

Despite that erosion, CEO Joe Forehand believes that the trading environment is improving. He cited as proof the strong growth in new contract bookings during the quarter of $4.75 billion, its second highest ever figure. However, that looks sluggish compared to the performance at Accenture’s biggest rival, IBM Global Services.

IBM said it booked $12 billion of contracts in the company’s first quarter to 31 March, helping IBM Global Services lift its revenues by a stunning 24% to $10.12 billion. The bulk of that increase, however, came from the folding of its acquisition, PricewaterhouseCoopers, into the company, an act that boosted IBM’s business consulting services revenues by 63%.

But outsourcing revenues were hardly sluggish, up 13%, while IBM GS’s ‘integrated technical services’ also showed some buoyancy with a 6% gain.


Key supplier financial results – April 2003
Company   Description   Period   Period end   Revenue ($m)   Rev change   Net inc ($m)   Prev net inc ($m)  
Accenture Ltd Consultancy and IT services 2Q03 28-Feb 2,826.2 -3% 118.7 10.6
Advanced Micro Devices Inc Microprocessors 1Q03 30-Mar 714.6 -21% -146.4 -9.2
Apple Computer Inc PCs and servers 2Q03 29-Mar 1,475.0 -1% 14.0 40.0
Art Technology Group Inc Online CRM s/w 1Q03 31-Mar 19.4 -29% -2.8 -2.8
Atos Origin SA* IT services 4Q02 31-Dec 821.8 3% n/a n/a
Baltimore Technolgies Plc* Information secuirty s/w 2H02 31-Dec 20.4 -1% n/a n/a
Cadence Design Systems Design automation s/w 1Q03 29-Mar 255.9 -26% -19.1 21.3
Check Point Software Tech Ltd Firewall, VPN security s/w 1Q03 31-Mar 104.8 0% 60.1 63.6
Chordiant Software Inc Customer management s/w 1Q03 31-Mar 13.8 -39% -6.9 -8.2
Cognizant Tech Solutions Corp IT service 1Q03 31-Mar 74.5 60% 10.2 7.1
Cognos Inc Business intelligence s/w 4Q03 28-Feb 163.7 15% 29.6 10.1
Corel Corp Graphical design &wp s/w 1Q03 28-Feb 28.3 -9% -0.6 -3.1
Documentum Inc Content mgmt s/w 1Q03 31-Mar 67.0 32% -5.0 -1.7
E.piphany Inc Customer interaction s/w 1Q03 31-Mar 22.5 2% -10.9 -17.0
Embarcadero Technologies Inc Database design &mgmt s/w 1Q03 31-Mar 12.2 -2% 0.9 0.7
EMC Corp Storage systems 1Q03 31-Mar 1,384.20 6% 35.2 -76.9
Entrust Technologies Inc Internet security s/w 1Q03 31-Mar 21.7 -21% -5.0 -3.3
Gateway Inc PC &PC servers 1Q03 31-Mar 844.5 -15% -197.7 -123.2
Hyperion Solutions Corp Analytic applns &OLAP s/w 3Q03 31-Mar 126.6 6% 8.3 3.1
IBM Corp Systems &IT services 1Q03 31-Mar 20,065.0 11% 1,384.0 1,192.0
iManage Inc Content mgmt s/w 1Q03 31-Mar 10.9 -7% -1.7 -0.3
Infosys Technologies Ltd Offshore IT development svcs 4Q03 31-Mar 216.0 55% 53.1 42.3
Intel Corp Semiconductors 1Q03 29-Mar 6,751.0 0% 915.0 936.0
Internet Security Systems Inc Intenet security s/w 1Q03 31-Mar 59.5 2% 5.4 3.4
Interwoven Inc Content mgmt s/w 1Q03 31-Mar 25.6 -22% -9.1 -15.7
Iona Technologies Plc Object middleware s/w 1Q03 31-Mar 17.0 -57% -11.9 -6.6
JDA Software Group Inc Retail management s/w 1Q03 31-Mar 41.3 -30% -2.2 4.5
KANA Inc Customer management s/w 1Q03 31-Mar 18.1 -28% -3.9 -6.8
Legato Systems Inc Storage management s/w 1Q03 31-Mar 74.0 33% -2.6 -46.7
Manugistics Group Inc Supply chain mgmt s/w 4Q03 28-Feb 65.5 -21% -111.4 -25.1
Mercury Interactive Corp Appln perf mgmt s/w 1Q03 31-Mar 110.4 22% 18.1 15.2
Microsoft Corp Applns and systems s/w 3Q03 31-Mar 7,835.0. 8% 2,794.0 2,738.0
MRO Software Inc Maintenance &operations s/w 2Q03 31-Mar 39.4 4% -0.2 -4.8
Network Associates Inc Security s/w 1Q03 31-Mar 215.2 -2% -3.7 15.8
Palm Inc Handheld computers 3Q03 28-Feb 209.0 -29% -172.3 2.9
Parametric Technology Corp Engineering design s/w 2Q03 29-Mar 171.0 -5% -15.2 -18.5
Parity Group Plc* IT services 2H02 31-Dec 132.4 -28% -36.5 -3.7
PeopleSoft Inc Business applns s/w 1Q03 31-Mar 460.3 -5% 38.5 44.5
Retek Inc Retail management s/w 1Q03 31-Mar 37.6 -30% 9.4 1.6
RSA Security Inc Security s/w 1Q03 31-Mar 61.3 10% 1.7 -13.7
SafeNet Inc Network security prods 1Q03 31-Mar 14.0 128% -9.7 -7.5
SAP AG* Business applns s/w 1Q03 31-Mar 1,504.8 -8% 184.1 64.4
Secure Computing Corp Security software 1Q03 31-Mar 17.0 26% 0.6 -1.3
SeeBeyond Technology Corp Appln/process integration s/w 1Q03 31-Mar 35.8 -12% -6.1 2.9
Silicon Graphics Inc Workstations and servers 3Q03 28-Mar 217.1 -31% -35 10.3
Storage Technology Corp Storage systems 1Q03 28-Mar 480.0 5% 16.5 6.0
Sybase Inc Database &appln dev s/w 1Q03 31-Mar 181.5 -14% 13.0 -116.4
Symantec Corp Security s/w 4Q03 31-Mar 390.0 26% 68.1 4.8
Tibco Software Inc Appln/process integration s/w 1Q03 28-Feb 63.7 -15% 1.7 3.4
Unisys Corp Systems &services 1Q03 31-Mar 1,398.9 3% 38.5 32.7
* figures converted to $US at exchange rates averaged over reporting period

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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