Indian outsourcers will be hit by U.S. financial crisis

BANGALORE – Indian outsourcers will be hit by the continuing crisis in the U.S. financial services sector, according to analysts.

“The key question is whether the crisis has already hit rock-bottom, or is there worse to come,” said Sudin Apte, an analyst at Forrester Research, in an interview last week.

At the current stage of the crisis, Forrester estimates that IT budgets in the banking, insurance and financial services sector will be cut by at least 15 percent to 20 percent. The National Association of Software and Service Companies (Nasscom) in Delhi has also said that the crisis in the U.S. financial services sector will have an impact in the short term on Indian outsourcers, as new projects may get delayed. The trade body will not, however, decide until December whether to revise its target of US$60 billion in IT and business process outsourcing (BPO) exports by 2010.

For Indian outsourcers, the outlook is quite grim as some of its customers like Lehman Brothers are no longer around, said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International. For those financial services companies that continue in business, software applications and new IT projects are not the top priority as they figure out what to do about the crisis, said Pai, who added that even ongoing IT projects may be slowed or stopped.

Software outsourcing to India is likely to be more hit than BPO because spending on IT tends to be more discretionary than spending on business processes, said Nikhil Rajpal, principal of Everest Group, a research and advisory firm.

Revenue from banking, insurance and other financial services customers already account for a large proportion of the revenue of Indian outsourcers.

India’s largest outsourcer, Tata Consultancy Services, for example, earned 43 percent of its revenue in the second quarter from the banking, insurance and financial services sector, while Infosys Technologies, the country’s second largest outsourcer, got 34.5 percent of its revenue from this sector.

About 15 percent to 18 percent of the business coming to Indian outsourcers from banking, insurance, and the financial services sector is now uncertain, Apte said.

Infosys has said that its revenue and staffing targets have not changed as a result of the financial crisis. The company did not comment for this story as it is in a “silent” period ahead of its quarterly results announcement next month.

The crisis in the U.S. financial sector will in the medium to long term lead to more work being moved offshore, as the companies try to cut costs, Rajpal said. Retail banks in the U.S. that went through a crisis last year are beginning to step up work offshore to locations like India to get quick savings, he said.

Investment banks that survive will want to offshore more to get higher cost benefits, Rajpal said. However, investment banks do not ship work offshore in as large volumes as retail banks and other retail financial services companies, he said. The common view is that companies send more work offshore in times of crisis, to take advantage of lower costs in India and other locations. “We do expect that a tightening of budgets in the U.S. will lead to more work being sent offshore to India,” said a Nasscom spokeswoman.

The problem this time is that a lot of the customers of Indian companies like Lehman Brothers and Merrill Lynch will not exist anymore, Apte said.

The impact of the crisis on Indian outsourcers will last for at least another three to four years as the financial services sector goes through a major restructuring, Apte said.

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