After focusing on cutting costs on selling, general and administrative expenses (SG&A), the IT industry seems to be increasing the offshore focus to gain higher margins and better bottom-lines. Large IT firms like Tata Consultancy Services (TCS), Infosys Technologies and Wipro are increasingly focusing on brining more work to offshore with clients demanding low cost work. Though the model is expected to help them in the short-term, it is not a sustainable model in the long-term, say industry analysts.
Before the downturn, the IT industry was maintaining a ratio of 70% offshore and 30% onsite component. But off late, the offshore component has been increasing, as companies tend to find more demand for the offshore work. This is largely because clients have cut down on IT spends and a low cost offshoring model helps them maintain IT budgets. Under the offshoring model, business processes of a company are outsourced to the Indian IT companies and are done from cost effective centres like India. Certain important aspects like consulting and application development are done onsite, and these are usually high value end work.
Wipro says it wants to target matured projects of application management and BPO, in a bid to increase the offshore component in these areas to about 85%. Wipro executive director and CFO Suresh Senapaty said, ?About 50-60% of our existing onsite work is capable of being done offshore and with this the offshore component can be increased up to 85%.? However, Senapaty refused to give any timeline, adding, ?It is a constant process to attain this ratio and generally we would target the matured projects. It is a sustainable model because that is what clients are asking for.? Application development, package implementation and consulting could be more of onsite says Senapaty.
The Rs 6,274 crore Wipro?s offshore component at the end of first quarter ending June 30, 2009 was at about 73% from about 69% in the same quarter last year. Offshore component of Infosys Technologies touched to 77.3% in the first quarter from 75.7% the same quarter last year and of HCL Technologies went down to 71.7% in the fourth quarter ending June 30, 2009 from 74.7% in the same quarter last year. Recently, Infosys Technologies CFO V Balakrishnan told FE, ?The offshore component will increase due to the demand but we do not intend to reduce the onsite component to 15%. Ideally, the onsite component should be around 25% in the current times.?
At the same time, there has been an increase in the revenues flowing in from the offshore with Wipro?s revenues increasing to 50.4% this quarter, a 4% shift, from 46.1% same quarter last year. TCS grew its offshore revenues shift drastically by 10% to 50.4% this quarter, from 40.9% in the same quarter last year. However, Infosys didn?t see a huge transition from 52.1% offshore revenues in first quarter last year to 53.6% in the same quarter this year.
However, analysts point out that the large firm will tend to miss out on the high-end value projects if they there is an imbalance in the offshore-onsite mix. Therefore the firms are likely to go back to their original levels of offshore component about 70%, once the stability in the global economy comes back.
A recent report ?Five themes in the stabilising macro-environment? by Viju George, senior analyst and vice-president at Edelweiss Securities, points out that Wipro has realised more than 50% of its revenues from offshore, highest since Q1FY 2001 and that the continued and inexorable offshore movement shown by TCS and Wipro is unlikely to sustain beyond two-three quarters.
The report added, ?If anything, disproportionate focus on this could impair making inroads into new business opportunities and higher-value, closer-to-the customer solutions such as consulting and system integration. What?s more in the long-term, entry into verticals such as government, healthcare (especially in front-end hospital management) will require higher level of onshore intensity. It would not be a durable value-creation model for offshore-intensive service lines such as BPO, infrastructure management and testing, to predominate the revenue pie. There must be a balance, aided by growth of onsite-oriented, domain-intensive, closer-to-the customer offerings.?
Industry watchers say, that the IT industry will start rebounding by the second quarter of the next financial year and the offshore component is likely to go down by then.