From: Baroni Limited [Baroni-Limited@tiscali.it]

Sent: 20 July 2007 19:52

Subject: Baroni Limited - Offshoring Newsletter' - 22/07

Sensitivity: Confidential

Reports & Surveys...

A Frost & Sullivan study cited that the worldwide shared services and outsourcing (SSO) market estimated to be worth $930bn in 2006 and is forecasted to grow at a CAGR (compound annual growth rate) of 15% (2006-2009) to reach a market size of $1,430bn by end-2009. The study outlines the global SSO activity across seven major industry verticals based on a survey of Fortune 500 and Forbes 2000 companies.

The top three verticals by SSO spending in 2006 were the banking, financial services and insurance (BFSI) sector at $273bn, technology/ICT sector at $233bn, and the healthcare industry with an estimated SSO spending of $130bn. BFSI together with the technology vertical constitute over 50% of the total spend on SSO.  The other verticals covered include transportation and logistics ($113bn), energy ($84bn), fast-moving consumer goods (FMCG - $59bn), and media and entertainment ($39bn).

The key drivers for SSO continue to be cost benefits through standardization, leveraging benefits of scale, and cost arbitrage. The study also observes that SSO operations, which is an integral part of business architecture, needs to adapt to vertical specialization models for businesses to achieve higher productivity and profitability.

Verticals such as transportation and logistics, energy, FMCG, and media and entertainment, for example, have developed effective SSO operating models for non-core functions such as IT services, finance and accounting, HR services, procurement, customer support and call centres. Sectors like healthcare, today, even outsource core research and development (R&D) functions, and this is likely to continue for a few years as healthcare companies try to find new drugs and reduce operating costs. Telecom companies in countries like India have outsourced network management, a function considered core for telecom operators.

While the captive model and the third party models have become dominant, increasing instances of hybrid models involving equity participation, joint ventures and project funding, are noted to be on the rise.

In addition, India was cited as the most preferred destination for SSO operations, followed by China, Ireland, Singapore, Malaysia, Mexico, the Czech Republic, Poland, the Philippines, and Canada, while countries, such as Russia (for software development) and Dubai (for BFSI services) are also emerging as preferred SSO destinations. The study also cited that the Philippines is a hub for back-office operations for IT and IT-related services, while Malaysia which already has a strong position in the BFSI, transportation and logistics, and energy verticals is also gaining the attention of technology companies (such as IBM and Satyam) due to its excellent infrastructure and low attrition rates.

According to TPI Index report for 1H 2007, the total contract value (TCV) of sourcing contracts awarded in 1H 2007 stood at $33bn, reflecting a 34% decline over the TCV awarded in 1H 2006. This value is the smallest first-half TCV value since 2001. In addition, the total number of sourcing contracts witnessed a 25% decline in 1H 2007 as compared to 1H 2006. The annualized contract value (ACV), or average annual spending also declined by 30% over 1H 2006 to reach $5.5bn in 1H 2007. The study also reported that the number of BPO contracts awarded in 1H 2007 (78 contracts) were lower as compared to the number of contracts in 1H 2006. In addition, according to the study, only 56 sourcing contracts were awarded in 1H 2007 in the Americas as compared to 86 contracts in 1H 2006. The TCV of these contracts declined from $24bn in 1H 2006 to $10bn in 1H 2007, reflecting the lowest first-half TCV value since 1994. In contrast, TCV of the contracts awarded in Europe increased from $14bn in 1H 2006 to $18bn in 1H 2007. In terms of sectors, financial services sector accounted for 47 of the total number of contracts having a worth of $11.5bn in 1H 2007. Though the overall outsourcing industry did not perform well in 1H 2007, yet TPI expects a growth of 5% in annualized revenue for 2007 as compared to 2006.

According to a report published by IDC, the information system (IS) outsourcing service market in the US is likely to grow by 3.5% to reach $37.8bn in 2007 as compared to $36bn in 2006. The study also cited that although the US application outsourcing market is small as compared to the IS outsourcing market, it is expected to grow faster at a CAGR of about 7.9% between 2007 and 2011. The application outsourcing market in the US stood at $10bn in 2006. In addition, the government sector has been identified as the highest spender, contributing about 25% to the total US IS outsourcing revenue. The sector was also identified as the biggest spender in the application outsourcing market, contributing about 17.9% to the total US expenditure. The other sectors which contributed significantly to outsourcing include discrete manufacturing, banking, and communications and media.

 Top Stories

Work Foundation says offshore threat 'exaggerated'
The fear of large numbers of good quality British jobs being outsourced to rapidly developing countries such as India may be overstated, says a new report published by The Work Foundation. The report, 'Offshoring, a threat for the UK's knowledge jobs,' said the UK imports almost four times more computer and information services and over sixteen times more business services from Germany than from India. And India ranks fifteenth on the list of countries from which the UK imports services.

Calyon Signs Three-Year Consulting, Systems Integration and Application Outsourcing Services Agreements with Accenture and Capco
Calyon, the Credit Agricole group's corporate and investment banking subsidiary, has signed two three-year consulting, systems integration and application outsourcing agreements with Accenture and Capco. The agreements are part of Calyon's IT investment program, which is designed to support the accelerated growth of the bank's capital markets business.

US co Synopsys plans to invest $50 m in India
Synopsys Inc, a $1.1-billion semiconductor design software firm, plans to invest $50M (Rs 200 crore) in its India operations. The proposed investment will be used to expand R&D facilities in Bangalore and Hyderabad over the next three years. The expansion exercise will also translate in an incremental growth in technical manpower in the country. Incidentally, Synopsys has already invested $100-million in its India operations since it floated a wholly-owned subsidiary in 1995.

Xerox Ireland to outsource 900 jobs to IBM
Xerox Ireland has inked an outsourcing agreement with IBM, under which the former will outsource its 900 call centre professionals to IBM Ireland. Under the agreement, there will be no loss of jobs and all the professionals will continue to work at Xerox's facility at Ballycoolin, Ireland. In another development, Ravi Venkatraman, the Director of Xerox Global Services (XGS), said that the company intends to double its headcount in India over the next couple of years. The company is also likely to increase its client base by about 50% by end-2007.

OGC extends LogicaCMG government payroll services agreement
Government procurement arm OGC buying solutions has expanded its framework agreement with LogicaCMG to offer the public sector extended payroll and human resources solutions. The expanded Catalyst framework agreement follows the original payroll agreement between the HM Treasury and LogicaCMG, originally signed in 2002.

Gruppo Monte Paschi Siena Hires IBM to Enhance Operational Consortium
Gruppo Monte Paschi Siena has awarded a 6-year, EUR 260M information technology outsourcing (ITO) deal extension to IBM. The new deal is likely to generate cost savings worth about EUR 48M for the bank, over its 6-year terms. The renewed deal does not simply focus on providing IT services, but focuses on covering a broader service relationship. As part of the innovative model, a 'test factory' will be launched to monitor and manage the bank's portfolio of applications.

ValueNotes releases 'Offshoring Legal Services to India: An Update
According to a report 'Offshoring Legal Services to India: An Update' released by ValueNotes, legal services offshoring is expected to generate revenues worth $640M in India by 2010 as compared to $146M in 2006. The Indian legal offshoring services industry provided employment to about 7,500 professionals in 2006. However, employment opportunities in the legal process outsourcing (LPO) sector is expected to increase to 32,000 by 2010. There are about 100 LPO service providers across the country which were classified into three main categories -captive centres, third-party niche service providers, and third-party multiservice providers. The leading companies in the domain possess strong entrepreneurial capabilities, a conspicuous onshore and offshore presence, coupled with a good brand name in the worldwide LPO market; factors that have attributed to their success.

 Service Provider News

Indian ITES-BPO segment grew by 33.5%: NASSCOM Survey
According to the findings of the annual survey on the performance of the Indian software and services sector conducted by NASSCOM, the IT-ITES industry in India generated revenues worth $39.6bn in 2006-07 (FY 2007) as compared to $30.3bn in 2005-06 (FY 2006), reflecting a y-o-y growth rate of 30.7% as against the projected growth rate of 27%. The revenues from the Indian software and services exports increased from $23.6bn in FY 2006 to $31.4bn in FY 2007, reflecting an increase of 33%. Within the export segment, IT services and ITES-BPO exports grew by 35.5% and 33.5%, respectively, and registered revenues worth $18bn and $8.4bn, respectively, in FY 2007. According to the survey, the Indian IT software and services sector is expected to witness a growth rate of 24-27% over FY 2007 to generate revenues worth $49-50bn in 2007-08 (FY 2008). The overall exports are estimated to grow by 26-29% in FY 2008, while exports from IT software and services, and ITES-BPO are expected to register revenues worth $28-29bn and $10.5-11bn, respectively, in FY 2008.

Indian Supreme Court judgement on Morgan Stanley’s captive centre in India provide clarity on taxation issues regarding captive units.
The Indian Supreme Court ruled that the income tax department can’t tax a part of the global income of a foreign company by attributing it to its India-based BPO. The parent would not be at risk of being taxed in India as long as it’s compensating its outsourcing unit on an arm’s length basis. Arm’s length pricing means that the MNC pays its Indian captive the same payment as it would to an outside agency. A bench comprising Justices Arijit Pasayat and SH Kapadia said, 'A foreign enterprise is liable to be taxed in India on so much of its business profits as is attributable to the PE (permanent Establishment) in India.' 'The court has clearly brought out that in determination of arm’s length compensation for the activities of the Indian captive company, the function and risk assumed must be duly considered. In order to avoid the pitfalls that differing interpretations of this may cause, it is desirable that there be an advance pricing mechanism, so that arms length compensation is determined in advance,'

Re rise may push small BPOs deep into the red
The results of Infosys BPO in the June 2007 quarter are a warning that the steep rupee appreciation may not only dent the margins of many BPO companies but could even wipe out the net profits of many small firms operating at lower margins. Infosys BPO, one of the top 5 third-party BPOs in the country, saw its net margins fall from 21-22% to 16-17% during the quarter, according to the Infosys management. Unlike the IT industry, which has both an onsite and offshore component, the BPO business is by definition an offshore process. So the impact on margins is greater. For IT companies, this is partially offset by the onsite component where both the revenues and expenses are in dollars so the margins are not affected. The offshore component is affected because the expenses are in rupees but the inflows are in dollars. 'If the BPO firm is operating at a net margin of 7-8%, then it is possible that it’s profits can be completely wiped out. The rupee has appreciated by over 13% against since last September. So unless rates can be re-negotiated in the next few quarters, it will be difficult going,' says Hexaware Technologies chairman Atul Nishar.

Convergys inks HR outsourcing deal with Starbucks
Under the terms of the contract, Convergys said it will provide human resource (HR) administration and payroll services for Starbucks employees in United States and Canada. The company will also offer benefits administration services for Starbucks's employees across Canada.

IBM in talks with Vodafone for India outsourcing
IBM aims to grab more outsourcing deals from Indian telecoms companies and is in talks with the Indian unit of Vodafone Plc, a senior official said on Friday. India is the world's fastest growing mobile market, adding more than 6M users a month, and telecoms companies are stepping up investment on technology. India had 130.6M mobile subscribers on the popular GSM platform at end-May.

LogicaCMG disposes of part of its Dutch payroll interests
LogicaCMG has agreed to divest a part of its Dutch payroll business to an unnamed company for an undisclosed amount. The move will allow LogicaCMG to focus on its HR and payroll BPO solutions for larger clients. The proposed disinvestment would correspond to about 25% of the company's HR and payroll product services revenue in the Dutch market in 2006.

HCL partners inks deals with Konica Minolta and CMS Cameron
HCL Technologies, in partnership with Konica Minolta Group (KM), has set up an offshore development centre (ODC) at Chennai, India. The centre will provide software service support in Japanese language for KM's Multi Function Peripherals (MFPs), printers, and medical equipment business lines. The two companies have signed the software service agreement for three years. In a separate development HCL has announced that CMS Cameron McKenna LLP has entered into an IT co-sourcing agreement with the Company, for availing its Integrated IT services covering IT Infrastructure management and application development.

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