Infosys released their earning today and listening in to the earning calls made me realize the conservative approach Infosys leadership used to be famous for has actually turned more cautious and somber.  The company which would always ‘under promise and over deliver’ seems to be facing headwinds now in a global slowdown environment on how to continue to outshine it’s competitors and continue it’s growth story.  Too early to show where the outsourcing industry is going based on one set of earnings, but there seems to be a cautious note in Infosys earning estimates. Maybe they are following the mantra of under estimating and over delivering.

 Granted that the overall market are down and with a number of factors affecting growth of outsourcing companies this is not an easy environment to be talking about growth strategies in. With the overall cautious mood around the world, European crisis continuing to stand up, Election year in the US and the slowdown of the emerging markets, nothing points to good times coming soon for the outsourcing firms.   What this has done is to create a delay in the system when it comes to taking decisions and spending large dollars for transformation, outsourcing engagements.  With many CxO’s also realizing that the new normal allows them to do more with less, decision making to make any incremental changes or transformational changes , specially that involving large dollars is going to undergo deeper scrutiny and also  require a solid business case.

The numbers

Revenue -Q3:  $1.806 billion (QoQ: 3.4% YoY: 13.9%)
Net Income: $458 Million  (QoQ: 11.4% YOY: 15.4%)
Gross 49 client added ( 6 fortune 500)
Gross 9,655 employees  added , Net 3,266
Total Employee Strength: 145,088 Employees
BPO Employee Strength: 19,425
Revenue BY Geography:North America – 63.7% , Europe – 22.6%, India – 2.1% Rest of the World – 11.6%
Estimated revenues for year ending March 2012: Between $7.029 and $7.033 billion YOY 16.4% growth
Cash and Cash equivalent available – $3.7 billion
Geography (Revenues) – N. America ( 63.7%), Europe ( 22.6%), India (2.1%), Rest of World ( 11.6%)
BFSI still the biggest revenue percentage ( 27.9%) lower than last quarter of 28.2%

What the numbers say

1. Infosys is lowering guidance for estimated revenues for the year ending March 2012 due to the headwinds and decrease in decision velocity they see in the markets.
2. Australian BPO has contributed fractional revenues to the earnings ( 4 to 5 million dollar range).
3. Infosys is not seeing any cancellations but slowing of ramp ups on existing contracts and longer decision making process
4. Percentage of revenue from non linear programs outside of Finacle is very small ( 30 to 40 million dollar range) although they see a total contract value of around $300 million dollars to be realized over the next 4 to 5 years. This includes the most talked about services like mobility, cloud etc..
5. Limited number of transformation deals closed by Infosys. Infosys has folded their consulting organization within the larger Infosys IT is still seeing slow traction in their transformation initiatives.
6. Higher revenue growth in Europe this quarter is not a norm.
7. Client budgets are marginally flat to marginally down
8. Given the slow down in decision making consulting engagements are slow to ramp up and lower utilization based on that for consulting staff.

Infosys which has started re organizing their client services staff has their work cut out for them as they have to work harder to get the traction in a tough environment.

Other outsourcing companies will be posting their earnings soon and I believe they may have better numbers than Infosys but will not have the shine on.

This is also not a typical outsourcing deal ( atleast not now), where a number of the employees from Friends Life, will transfer to Diligenta but will stay in the UK.

Friends Life is owned by Resolution, a UK takeover firm, according to Reuters sees a 27% cost saving with the deal with TCS and believes that the Euro crisis bought them closer to make the decision to outsource ( Reuters).

It is interesting to note that this is a 15 year deal but the cost saving expectation in the deal is an upfront savings of approx $230 million by 2013, so technically in the second year of operations. Typically the outsourcing deals have a longer payback period, so looks like TCS has possibly front loaded their investments to get the deal.

Back in February, Jack filed a lawsuit against Infosys alleging that the company send employees from India on short term visa ( B-1) to do work which is not allowed on that type of visa. B-1 is a non-employment visa category which specifically states the visa holder can or cannot do a number of activities on the visa.

( As per the US state gov website:  Business Visitor Visas (B-1) – For example, if the purpose for your planned travel is to consult with business associates, travel for a scientific, educational, professional or business convention, or conference on specific dates, settle an estate, or negotiate a contract, then a business visitor visa (B-1) would be the appropriate type of visa for your travel.)

Without arbitration and a public trial, internal Infosys document regarding visa policies will be dragged in open view. If there are
any challenges or holes exposed due to any irregularities, it could create concerns for visa issuance for IT outsourcing vendors.

A number of the IT outsourcing providers have been also working to change their branding to showcase their local hires, more strict adherence to visa policy and procedures and reduced number of people they are getting to the US in H-1 or L-1 visas where not required.

Wipro will consolidate its Indian and global IT infrastructure business into one unit to tap the estimated USD 250 billion IT infra services segment.

The new unit, called as Global Infrastructure and Services (GIS), will be headed by Wipro Infotech’s Senior Vice President and Business Head (India, Middle East and Africa) Anand Sankaran.

As a result of the consolidation, Deepak Jain would work closely with Anand Sankaran to build and execute strategies to enable Wipro’s leadership in the global Infrastructure services market, which is currently estimated to be USD 250 billion, Wipro Technologies, the IT, consulting and outsourcing business of Wipro, said in a statement.

Deepak Jain is currently serving as Senior Vice President and Global Head of Technology Infrastructure Services business with global responsibility for IT Infrastructure life cycle, sales, marketing, system integration and service delivery businesses.

Infrastructure services have been a high growth and high impact segment and the market is poised for the next level of transformation with increased focus on variabilisation of IT, it said.

Read more at: http://profit.ndtv.com/news/show/wipro-consolidates-global-it-infra-business-187279?cp

Here is the press release from Genpact:

NEW YORK, May 16, 2011 – Genpact Limited (NYSE: G), a global leader in business process and technology management, today announced that effective June 17, 2011, NV “Tiger” Tyagarajan will become the President and Chief Executive Officer of the company and will be appointed to the Board of Directors. Tyagarajan, the current Chief Operating Officer of Genpact, succeeds Pramod Bhasin who has decided to step down as CEO and member of the Board and become Non-Executive Vice Chairman of the company.

“Tiger is a superb choice to lead Genpact to its next phase of growth and development,” said Robert Scott, Chairman of the Board. “To have someone of Tiger’s talent and experience ready for this role is a testament to Genpact’s deep leadership bench and the strength of its succession planning process. On behalf of the Board, I would like to thank Pramod for his vision, leadership and outstanding contribution that have built Genpact into a global leader in its industry. He will leave a significant legacy.”

Tyagarajan was CEO of Genpact from 1999 to 2002 and led the business through a critical growth phase as a subsidiary of GE. When Genpact became an independent company, Tyagarajan rejoined Genpact from GE Capital U.S. as EVP, Sales and Business Development from 2005 to 2009. Thereafter, he took on the role of Genpact’s COO. Tyagarajan began his career with the Unilever Group in India, and then worked with Citibank, India. He joined GE Capital in 1994 and held a variety of leadership roles in both India and the U.S. until 2005. He is a mechanical engineer from the Indian Institute of Technology, Mumbai, and holds an MBA from the Indian Institute of Management, Ahmedabad.

“I am delighted to be able to hand over the reins of the company to my long term business partner Tiger,” Bhasin said. “We have worked together for over a decade to build Genpact into a truly global leader. I am confident that he is the right person to take Genpact forward in its next stage of growth. I have been truly privileged to lead this remarkable company and its employees from inception and to have helped create an industry that now provides employment opportunities to millions of people around the world. Along with helping Tiger, particularly in the areas of acquisition integration, organization development and growth in new geographies, I now look forward to other pursuits.”

Tyagarajan said, “I want to take this opportunity to thank Pramod and acknowledge his contribution as the founder and CEO of this company. He has been an extraordinary leader and we have all benefitted tremendously from his leadership and vision over the years.”

Tyagarajan continued, “I am hugely excited to lead Genpact. There are tremendous opportunities ahead of us. We are fundamentally improving the way our clients work. We are building a new “Science of Process” and continue to innovate and invest in comprehensive, cutting-edge technology-based solutions. The recent acquisition of Headstrong has given us exceptional high-end capital markets domain and technology expertise. I look forward to working with our terrific team to continue to create exceptional value for our clients and shareholders.”

Conference Call Genpact management will host a 30-minute conference call beginning at 8:45 a.m. ET on May 16, 2011. To participate, callers can dial 1-800-260-8140 from within the U.S. or 617-614-3672 from any other country. Thereafter, callers will be prompted to enter the participant code, 54966460.

For those who cannot participate in the call, a replay and podcast will be available on Genpact’s website, www.genpact.com, after the end of the call. A transcript of the call will also be made available on Genpact’s website.

About Genpact Genpact is a global leader in business process and technology management, offering a broad portfolio of enterprise and industry-specific services. The company manages over 3,000 processes for more than 400 clients worldwide. Putting process in the forefront, Genpact couples its deep process knowledge and insights with focused IT capabilities, targeted analytics and pragmatic reengineering to deliver comprehensive solutions for clients. Lean and Six Sigma are an integral part of Genpact’s culture and Genpact views the management of business processes as a science. Genpact has developed Smart Enterprise Processes (SEP^SM), a groundbreaking, rigorously scientific methodology for managing business processes, which focuses on optimizing process effectiveness in addition to efficiency to deliver superior business outcomes. Services are seamlessly delivered from a global network of centers to meet a client’s business objectives, cultural and language needs and cost reduction goals. Learn more at www.genpact.com.

Safe Harbor This press release contains certain statements concerning our future growth prospects and forward-looking statements, as defined in the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in such forward-looking statements. These risks and uncertainties include but are not limited to a slowdown in the economies and sectors in which our clients operate, a slowdown in the business process management and information technology services sectors, the risks and uncertainties arising from our past and future acquisitions, our ability to manage growth, factors which may impact our cost advantage, wage increases, our ability to attract and retain skilled professionals, risks and uncertainties regarding fluctuations in our earnings, general economic conditions affecting our industry as well as other risks detailed in our reports filed with the U.S. Securities and Exchange Commission, including Genpact’s Annual Report on Form 10-K. These filings are available at www.sec.gov. Genpact may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and our reports to shareholders. Although Genpact believes that these forward-looking statements are based on reasonable assumptions, you are cautioned not to put undue reliance on these forward-looking statements, which reflect management’s current analysis of future events and should not be relied upon as representing management’s expectations or beliefs as of any date subsequent to the time they are made. Genpact does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of Genpact.

Contact:

Investors
Shishir Verma
+1 (646) 624 5900
shishir.verma@genpact.com

Media
Gail Marold
+1 (919) 345 3899
gail.marold@genpact.com

A number of niche firms in certain areas have struggled to grow and survive as those service get more commoditized. Example are F&A firms , Legal Process Outsourcing .

According to eFinancialCareers, HSBS plans to save between $80-$110 million by shipping 35% of Technology, 40% in Finance & 25% in Operations to low cost locations.

Top 5 Customers generate: 17.0%
Top 10 Customers generate: 28.8%. Top Ten Clients accounted for $100 million dollar in revenue.
Operating Margin: 19.4% compared to 19.1% last year.
Increase in Operating Margins: Increase in pricing, operating efficiency and offset by increase in salaries.
Using the extra profitability above the margin for:
1. Hiring Client Partners and Relationship Managers with specific domain expertise
2. Training technical staff in broader range of capabilities
3. Strengthening Business Analytics Capabilities
4. Continue to broaden geographic reach
5. Rewarding high performers
New construction of 8.0 million sq. ft of new development. Expenditure of $ 500.0 Million between 2011 and 2014.
Short term cash and cash equivalent of $2.18 billion

Continues to build their Cognizant Business Consulting Practice. Currently 2,500 consultants with higher utilization and bill rate. Cognizant sees growth in areas outside of it’s traditional application development and maintenance areas such as business analytics, IT infrastructure and BPO outsourcing.
By Segment:
Financial Services: $569.9 Million ( $398.7 last Q)
Healthcare: $349.0 Million ( $252.4 last Q)
Manufacturing/Retail/Logistics: $274.3 Million ( $173.1 last Q)
Others: $178.0 Million ($135.5 last Q)

Financial Services Area: 41.6 % of the Revenue
2.8% Sequential Growth, 43% Year on Year Growth. Earlier activities were supporting M&A activities within the financial services. Continue drive to manage cost, grow operational effectiveness plus invest in new areas such as mobile and social CRM platforms and technology refresh of legacy platforms.
Healthcare: 25.4% of the Revenue
2.9% Sequential Growth, 38% Year on Year Growth. Cognizant saw a growth in consulting revenues in this segment as companies look to transform clinical and commercial processes, medical claims analytics, expansion of BPO capabilities including clinical operations, claims, benefits coding and enrollment, code set 5010 testing work and ICD-10 assessment and remediation work and platform modernization initiatives.
Manufacturing, Retail & Logistics: 20% of Revenue
12.7% Sequential Growth, 58.7% Year over Year growth. Demand within this segment was driven by continued demand for large-scale transformational and systems integration projects among our major Manufacturing clients. Increased demand from our Retail clients for both development projects and core Retail systems, as well as Business Transformation projects, focused on multichannel e-commerce integration, and Consulting work and global distribution in Logistics, as well as development of enterprise, architecture strategies and intelligent store concepts.
During the Quarter Cognizant continued the program of eliminating smaller clients.

Planned wage increases in 12 to 14% range for employees.

Research from Ovum reveals many CFOs have no appetite for offshoring finance and accounting. This is despite the testimony of CFOs who have outsourced, claiming efficiency has improved.

Ovum found CFOs at US and UK companies with turnover greater than $500m are less certain of the benefits of offshore finance and accounting than they are of cloud computing strategies.

The biggest barrier to offshoring finance and accounting is loyalty to in-house workers, with 44% of companies revealing this as an obstacle.

Peter Ryan, Ovum lead analyst, said: “We don’t know if this is due to a sense of responsibility for their staff or a desire to keep their skills, but it is likely to be a combination of the two.”

Concerns over losing control and over whether savings targets would be hit were seen as obstacles to 31% of respondents.

The Fortune Magazine’s ranking of America’s largest companies, lists Cognizant at number 484, with $4.59 billion in annual revenue for 2010.

Cognizant has managed to enter the list in just three years after it made it to the Fortune 1000 list. The NASDAQ listed company has over 80 per cent of its operations and over 90 per cent of its workforce out of India.

Cognizant has continuously managed to deliver double digit sales and revenue figure for nine straight quarters. The company has also guided to go beyond revenues of Wipro in the next quarter to become the third largest IT exporter out of India. As of March 31, 2011, Cognizant employed approximately 111,000 people worldwide serving over 700 clients.

Cognizant is set to overtake Wipro as the third largest Indian IT exporter in June.

“Since our inception just 17 years ago, we have built a new business model for consulting, IT and business process outsourcing services—combining our high-touch approach to client engagement and a depth of industry expertise with high-quality solutions and global footprint—to deliver a distinctly superior experience to our clients,” said Francisco D’Souza, president and CEO of Cognizant.