BPOs under threat?

Forrester Vice-President John McCarthy Thinks So

Atop-ranked US analyst has said the events that shook Wall Street last week spell the end of the golden age of offshoring for India. Days after Wall Steet’s collapse, John McCarthy, a vicepresident and principal analyst with US research firm Forrester, said the scale of the crisis had rendered all previous studies including Forrester’s own survey, released earlier this month, redundant, and that Indian IT providers should prepare for slower growth and lower profits.

“It is naive to say an economic slowdown is good because cost-cutting will lead to higher offshoring. This is no longer a recession, it is fundamentally a restructuring of financial services that is taking place,” he told ET in Boston, Massachusetts. Many analysts, including research firm, Gartner, had said there could be higher opportunities for Indian companies and for offshoring.

However, Mr McCarthy said there was an impression that the financial services sector was over-staffed. Mergers and acquisitions, and the conversion of large investment banks into commercial banks meant there would be fewer employees, fewer vendors and less extravagant IT budgets.

These developments, he said, would have a huge impact. Growth from financial services, the most aggressive buyers of technology, he predicted, would ‘go back to 25% and
stay that way’. To put this in perspective, IT bellwether Infosys Technologies had shown a 50% growth in revenues from financial services clients in FY07.

What makes Indian IT vendors more vulnerable is their significant exposure to financial services clients — almost double that of their global peers as a percentage of revenue, according to Mr McCarthy. “There is no denying it will particularly impact Indian companies. In a way, they are paying the price for having under-invested in marketing all these years.... Margins will continue to drift down to 15%, and there will be real pressure on the topline,” he said. Also, the big difference between the last slowdown and the current one, is that offshore presence of global vendors like IBM and Accenture has swelled from around 2,000-3,000 employees to 60,000-70,000.