Obama’s strident rhetoric begins to bite Bangalore

IT's Big 3 Wipro, Infosys & TCS Saw Deal Postponements In The Past Quarter

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 secondbiggest 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 Mc-Carthy, 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. Cos now focus on short-term results
    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.
    While customers such as Citibank and JP Morgan have resumed spending on projects they shelved over past 18 months, the focus has shifted to more short-term results.
    This poses difficult questions for vendors seeking to address the immediate demand because they need to hire additional staff.
    "We are taking risks in terms of recruiting. We have realised that in the short term there is visibility, so we want to take advantage of the growth. If the growth slows down again, we will have a larger bench," said Mr Gopalakrishnan.
    America goes to the polls on November 2 to elect a brand new House of Representatives, one of the two key lawmaking bodies. Elections will be held to all the 435 House seats and for all the 36 senate seats. Several states will also hold elections for governor and state House and senate seats. Opinion polls show that the Democrats are trailing the Republicans and President Barack Obama's approval ratings have suffered a serious blow.
    Both the party and the president have responded by taking a populist approach to certain issues, especially unemployment. Chuck Schumer, the senator from New York, lashed out at Infosys last month, calling it a chop shop, a derogatory term, which refers to stolen auto shops where parts are dismantled to be resold later. The governor of Ohio, Ted Strickland, last week announced that his state will ban outsourcing of work to overseas destinations by government departments. President Obama, who was voted to power in 2008 on the back of strong trade union support, also announced last week that the government will end tax breaks for firms that send jobs overseas.
    Multinational outsourcing rival Cognizant, which grew its April to June quarter revenue sequentially by 15.2% even as the country's Big Three struggled to get into double digits, is also seeing uncertainty become a part of the future business.
    "I think the economic indicators over the past few months have been worse than what there were earlier, but that's the new normal we have to deal with," said Cognizant CEO Francisco D'- Souza. "There are still some structural challenges that exist in the US economy — unemployment is still high, debt is high, both public and private," added Mr D'Souza.
    Some customers are waiting for the November elections to happen and take stock of economy next year before committing to any large IT projects, such as ERP upgrades. Enterprise Resource Planning (ERP) helps large manufacturing and retail firms automate and integrate their processes of production, finance and inventory.
    "In some cases, we are seeing the sales cycles go back to the 2008 levels. In fact, one of our customers has recently deferred an SAP upgrade scheduled for this year," said the CEO of one of the large Indian tech firms. He requested anonymity.
    If the housing recovery takes shape after the November elections as predicted, things could settle down for the industry, experts say.
    "The 6-12 month period after November elections will need to be watched closely," said Mr Mc-Carthy.
    Meanwhile, some customers are beginning to tighten their purse strings and are asking vendors such as TCS, Wipro and Infosys to fund their new projects. Such engagements demand upfront investments of $1-10 million, depending upon the number of user licences to be bought and amount of customisation required, among other costs.
    "Clients are not getting any more money and are asking vendors to manage and even lower costs with what they have," says McCarthy.