IT future looks hazy as US cos turn wary of offshoring

NEW DELHI: America’s worsening economic climate and incendiary political rhetoric could end up hurting the fortunes of India’s $50-billion outsourcing industry as US firms start avoiding overseas contracts fearing a backlash from skittish politicians.

At least six customers of India’s top three IT companies — Wipro, Infosys and TCS — have postponed decisions on new contracts in the past quarter, triggering concern in Bangalore and Mumbai, the headquarters of the big Indian IT firms.

“What we see from customers is that they are committing short term; they also reserve the right to cancel, so clearly, everybody is playing the short-term game at this point in time,” said S ‘Kris’ Gopalakrishnan, chief executive of India’s second-biggest software exporter, Infosys.

The trend, if it continues, will be a body blow to the outsourcing industry, just recovering from the worst slowdown in its history. Hiring in IT companies has picked up in the past few quarters and so has earnings growth. But another round of weakness, bound to be triggered if American firms pull the plug on new orders, will definitely damage confidence and financial performance, experts said.

“Customers are not pulling any trigger yet on big contracts, and unfortunately, the November election is making them even more cautious,” John C McCarthy, vice-president and principal analyst at US-based Forrester Research said. Indian firms, he added, were hoping that customers in the US would start doling out large contracts after the European debt crisis, which didn’t happen. Large banks and manufacturing companies in the US are wary about demand for their products, and have been trimming their payroll to boost profits. This has resulted in high unemployment rates of 9.6%, the biggest slump in hiring since the post World War-II era.

US economic growth too has slipped to about 1.6% in the second quarter, less than the 3.7% growth in the first quarter. A group of economists recently cut GDP forecast for both 2010 and 2011 and predicted that unemployment will stay high.

“They are not actually increasing their own recruitment, which means that unemployment unfortunately will continue to be high,” Mr Gopalakrishnan added. Since the recession began in December 2007, the US economy has shed 8.4 million jobs, and according to a research note put out by the Federal Reserve Bank of San Francisco, up to 2,94,000 new jobs will need to be added every month for bringing the unemployment rate below 8%.

Infosys, which counts Bank of America and several American retailers among its top customers, is among the first ones to flag the bumps ahead for the sector. “The customers are making it clear that if we have to pull back, we will pull back suddenly,” said Mr Gopalakrishnan. According to Mr McCarthy, the uncertainty along with the November elections could affect the IT budgets of customers next year.

“The momentum we saw until first quarter has slowed, we could now see the budgets grow by 2% instead of 3% forecast earlier,” he added. Analysts at brokerage firms tracking the sector said Indian tech firms are seeing project delays and deferrals for the first time in four quarters.

“Our channel checks at Wipro indicate that the company has seen signs of project delays/push-out in ramp-up plans by a few large clients due to the uncertain macro environment,” Morgan Stanley analysts Vipin Khare and Gaurav Rateria said in a research note on September 9. “This is the most concrete data point we have come across so far that tends to explain the caution in recent management commentary across large vendors,” they added.

Source:ET