Offshoring Will Remain Strong For India's Big Four - InformationWeek

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Offshoring Will Remain Strong For India's Big Four

Year-end financial results released this month by India's four biggest IT-services vendors show that, despite some recent setbacks, offshore outsourcing continues to boom.

Infosys Technologies, Satyam Computer Services, Tata Consultancy Services, and Wipro Technologies all logged robust performance for their fiscal years ending March 31. This suggests that the offshoring of computer services by U.S. businesses isn't likely to lose steam anytime soon, as some recent events suggest it might. "We do not think the fundamentals of a growing and still-nascent industry change in a three-month period," said Adam Frisch, a UBS Securities analyst, in a report issued last week.

Among the events that point to a possible cooling is a Deloitte Consulting survey revealed last week showing that 70% of large companies that outsource IT or business processes have had "significant negative experiences." Earlier this month, several former employees of Indian business-process-outsourcing vendor Msource, a Citibank vendor, were arrested for stealing more than $350,000 from four of the bank's customers. And despite strong gains in 2004, Infosys said revenue in 2005 would fall short of analysts' expectations of $2.18 billion. The company said it expects sales of between $2.04 billion and $2.07 billion.

Tata also revealed some weakness--its fourth-quarter earnings dropped 34% from the prior quarter to $107.8 million. The company blamed that mostly on the weak U.S. dollar and a new employee bonus program.

Still, a slowdown in offshoring looks unlikely. "There could be some blips, but the long-term factors that favor outsourcing are still in place," Gartner analyst Frances Karamouzis says. Businesses have little choice but to continue to outsource more IT work because they don't have the internal resources to meet their needs, she says. "Some big companies are still operating with green-screen applications because they don't have the IT people or the skills to move off legacy systems," Karamouzis says.

UBS's Frisch believes offshore IT-services companies will continue to grow, particularly as they add capabilities such as consulting and infrastructure management. Last week, Satyam paid $23.2 million to acquire Citisoft, a technology and consulting company in New York and London that focuses on investment management. Satyam could pay an additional $15.5 million if certain performance requirements are met.

Also last week, offshore application developer Cognizant Technology Solutions Corp. bought Chicago business-technology consulting firm Fathom Solutions for $19 million. Cognizant, Frisch said, will benefit in the long run from "offshore growth trends which remain very strong."

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