Budget cuts and uncertainty ahead for Indian outsourcers

However, Indian outsourcers could benefit from customers looking for low-cost suppliers

Economic problems in the U.S. are likely to lead to cuts in IT budgets, of up to 10 percent in some cases, according to a report released Monday by Offshore Insights, a research and advisory firm in Pune, India.

Budget cuts have usually helped Indian outsourcers as companies look to low-cost locations to save money. But uncertainty about what shape the budgets will take is leading customers to delay decisions, and cut discretionary expenditure on IT, said Sudin Apte, CEO of Offshore Insights.

In the U.S. the budgeting process for the next year typically starts around October. If companies cut their budgets for next year, their budgets for the next two quarters will also get affected, Apte said. "If they find they don't have enough money for next year, they will also lower their spend for the rest of this year," he added.

The study, which polled 31 IT and business executives in various industries in the U.S., found that the overall mood is very conservative and confidence levels are quite low.

Other analysts also describe the outlook as uncertain. "The outlook given the current macroeconomic environment is that the IT budgets for next year are likely to be flat, with some downside risk, and companies will try new models and technologies to get more efficiency," said Amneet Singh, vice president for global sourcing at Everest Group.

"Customers may, however, reassess the situation in October or November," Singh added.

Indian outsourcers have described the current economic conditions in their key markets of Europe and U.S. as challenging.

Infosys' new CEO and managing director, S. D. Shibulal, said on Monday that there were challenges in the macroeconomic environment in the U.S. and Europe, and customers are delaying in making decisions and finalizing orders. But India's second largest outsourcer has not yet seen any "drastic reactions" from clients at this point, or project cancellations, Shibulal said.

Infosys said it would not revise its revenue guidance of about US$7.2 billion for its fiscal year ended March 31, 2012. "At this point, there is nothing going on that would lead me to believe that a change in guidance is required," Shibulal said.

If IT budgets are cut by 4 to 5 percent, then companies will start looking at expanding outsourcing to low-cost locations like India, Apte said. "Buyers then want to do what they had planned to do earlier, and look to India to cut costs," he added. After a small blip during which companies make the transition, Indian outsourcers will start seeing a growth in business, Apte said.

But if budgets get cut beyond that, then Indian companies will get hit, as entire projects will get shelved, and the question of looking for a low-cost option like India will not figure, Apte said.

India's National Association of Software and Service Companies (Nasscom) said earlier this month that an economic slump in the U.S. will benefit Indian outsourcers, as U.S. customers look to cut costs. The trade body has maintained its earlier estimate that the country's IT and services exports will grow by 16 to 18 percent in the fiscal year ending March 31, 2012, according to reports.

The benefits for Indian outsourcers will likely come with some difficulty this time, because of the high unemployment rate of over 9 percent in the U.S. Companies are under pressure to keep jobs at home, and this will affect offshoring to India, Apte said.

To counter these pressures, outsourcers are expanding in the U.S. Aegis, a business process outsourcing company in India, has committed to add 4,000 staff in the U.S. over the next two years.

Infosys also plans to add about 1,500 staff this year in the U.S. This will not necessarily increase the cost structure for the company, as the staff will be engaged in high-end services that require staff close to the customer and the market, Shibulal said.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

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