Eurozone concerns hit home

T.E. Raja Simhan

http://www.thehindubusinessline.com/features/eworld/article3489549.ece?homepage=true&ref=wl_home

A recent report in The Guardian said that a Greek exit from the single currency threatens to plunge Britain into a second recession equal in ferocity to the record post-war slump of 2008-09. The report quoted experts responsible for the government's economic forecasting.

Experts warned that there was risk that a fresh downturn would do irreparable damage to the UK.

If the UK plunges in to a second recession, it will be a disaster for the Indian IT industry. The reason? The UK is the second largest market for the IT industry after the US. So, any disturbance there could affect the industry badly. Although some of the companies are nervous about what’s happening in Europe, they still feel the UK/Europe will bring in more business in the future.

Take Tata Consultancy Services for example. Nearly 15 per cent of the company’s revenue comes from the UK. It is a similar case with most of the IT companies.

Mr N. Chandrasekaran, CEO, TCS, had earlier told analysts that growth in the UK was a little lower, but is still pretty good. “I think we will do well in both North America and Europe – which is UK and Continental Europe put together - based on the deals we have signed and what we see in the marketplace, I think we are expecting to do well in those markets.”

“It appears that we are in uncharted waters. The idea of the Euro itself is no more than a decade or so old, and the fact that the UK has stayed out of the Eurozone may yet come to its aid. The Greek issue has been hanging over us like a storm-cloud for some time now, and I believe it has already entered the markets and decision making across the continent”, says Mr Siddharth A. Pai, Partner, Global Resourcing & India Operations, Information Services Group.

The UK’s quarterly contract values for large outsourcing contracts have historically been within a range of Euro 2-4 billion. However, there was a reduction in the value last quarter when compared to the same quarter from a year ago as well as when compared to the average for the previous five quarters.

“This was not contained to the UK alone. We saw a reduction in values in all European geographies except Germany, and this is probably more in line with the market taking a breather after two strong quarters in the latter half of 2011,” he said.

Taking a good look

The Eurozone situation is putting additional pressure on organizations to re-look at their budgetary spends, said Roop Singh, Vice President, Wipro Consulting Services. “We have not as yet seen any slow down but rather smaller cycles on budgets rather than long-term program.”

On the positive side, companies are moving from a pure cost play to more aggressive revenue play. While they are keen to look at cost measures, they are also very keen to work with partners to identify areas which can help them generate new revenue which in turn provides opportunities for the Indian IT sector. “They are cautious and are looking for mechanisms,” he said.

Wipro said that it was watching the situation closely. Over the last 12 months, Wipro, through its consulting and domain teams was able to create deeper relationships with not only the CIO community but also with the CXO suite in the business side. This gives them some foresight into their thinking that further helps them prepare how they can work and help work with the IT community within the organization to drive better value for the business.

“We will continue to invest in building deeper relationships across the organizations and partner with them to help provide agility in meeting the current business needs. We have continued to invest in high-end consulting and domain expertise. This is the time to stand by our partners and work with them,” he said.

Watching emerging economies

Says, Joseph Walent, an analyst with the US-based Technology Business Research, Inc, which tracks the IT sector keenly, the possible disruption precipitated by Greece’s exit from the European single currency is a real concern for all members of Europe. Extending to the global economy, the rebound in technology spending in the UK has never really recovered, and thus would not have far to fall.

The UK economy is on a path of slow recovery in any case. Whether Greece stays or goes, IT services will continue to adapt to the market realities, honing in on areas where real demand continues to register. For instance, the UK government has implemented a strategy to incorporate cloud-based IT architectures and service delivery, establishing the G-Cloud framework, a procurement network and interface dubbed “CloudStore.” Through this, various government agencies can browse and select from around 1,700 services from 257 preapproved providers, he said.

Most vendors have indicated a conservative outlook for the Europe, Middle East and Africa region in the first quarter of 2012, and the recent events around the Greek elections have done little to dispel the outlook.

Most multinational providers have been actively investing in emerging economies to offset what they see as continued stagnancy in the Western European IT Services market. In some cases, providers are transferring resources from Europe to the Middle East to take advantage of the increased IT spending in the region. That being said, signs from vendors indicate a prolonged period of muted demand in the UK, with most engagements focusing on cost reduction and improving operational efficiency, he said.

Rajeev Sawhney, President, HCL Technologies, Europe, says that despite the economic uncertainty and Eurozone crisis, the company has seen continued traction in Europe including UK, with many first-time outsourcers. The geography leads the growth for HCL Technologies with 25 per cent year-on-year on LTM basis.

Over the last two quarters, the company has announced significant engagements in this region with companies like UPM, Statoil and AstraZeneca. The geography booked a robust performance in view of strategic investments made by us. Our key differentiator in Europe is strong local presence, and we stay committed to increase our market share, he said.

Scope for growth

Infosys is confident about this region as clients are looking to partner with it to identify areas for growth and process efficiency, said B.G. Srinivas, Member of the Board, Head of Europe and Global Head of Financial Services & Insurance, Infosys.

Europe has remained the biggest market for Infosys outside the US contributing 21.9 per cent of the revenue as of the year ended March 31, 2012. It is growing faster than other geographies for the company and Infosys continues to see opportunities for growth as they partner with clients to transform their businesses and to help them stay competitive.

The company has 16 offices across Europe with over 7,000 employees and is expanding its footprint. It is looking at increasing its workforce by 10 per cent in this region over the next 15 months, said Srinivas.

There is an increase in the client’s appetite for solutions in areas such as cloud computing, mobility and big data that will help them innovate in their existing business models and go beyond efficiency gains and we have been investing in these areas. In the UK specifically they are seeing growth from sectors like Financial Services and Insurance, Retail, CPG, Energy and Utilities and Telecom.

Sanjiv Gossain, Senior Vice President and Head of UK and Ireland Operations, Cognizant, says that downturns or challenging economic situations have always served as catalysts for the growth of the IT industry. The current situation is no different in the UK. Today, clients are looking to buy a broader range of services — consulting, applications, infrastructure, and business process services. Another significant trend we are seeing is that clients want to navigate both cyclical and structural shifts simultaneously.

Europe remains an attractive long-term market for us. The overall European IT services market is roughly the same size as the North American IT services market, yet the penetration of the global-delivery model in Europe is currently a fraction of that in North America. As such, we believe Europe merits our continued focus and investment, he said.

In the March-ended quarter of 2012, the UK represented 10.5 per cent of our total global revenues, and grew 2.5 per cent sequentially and 10.7 per cent year-over-year.

raja@thehindu.co.in