With three weeks of sun, sand and Italian culture under my belt I have focused this NewsLetter on some recent reports on BPO and IT. The link? None really, just felt that it made easier reading. I trust they will be interesting and informative, and more to the point of use.

According to a study by Gartner, the UK market for F&A BPO is set to be worth GBP 2.1 billion by 2008, representing a 10 percent growth from the present level. The report indicates that there are around 70 outsourcing deals in Europe, at present, with an average value of GBP 28.5 million to GBP 71.5 million. It also predicts that by the end of 2006, an additional 12 major deals will be signed in the region. Gartner believes that companies which have a large pan-European F&A team could benefit from automating more activities and consolidating to a centralized location, and are ideal candidates to outsource these services.

A study carried out by Baring Private Equity Partners (India), a venture capital financing firm, states that the worldwide Knowledge Process Outsourcing (KPO) industry has the potential to reach USD 16 billion by 2010. The Baring report estimates that the financing of Merger and Acquisition (M&A) activity would be the major uses of venture capital in KPO. Comparing the KPO and BPO sectors, the study found that revenue per hour in the former was USD 8 to USD 11 per hour, while it was USD 22 for latter. Capital expenditure per seat in both the activities was relatively level at USD 6,000 to USD 8,000. The study opined that higher revenue and better profit per seat would make KPO an attractive investment proposition.

According to a report by Gartner, the Indian IT services market has recorded the strongest growth at 26.7 percent in 2004-2005 for the Asia Pacific region. The report also predicts that the Asia Pacific IT services market will have a CAGR of 8.9 percent from 2004 through 2009, outpacing the global growth rate of 6.1 percent. Gartner sees emerging markets such as India and China as the growth drivers across the region in the next few years. It also forecasts that professional services, led by development and integration, IT management and consulting, will be the region's strongest performing IT services market segment.

Analysis of Indian Software Giants Infosys, TCS, Wipro Performance of FY 05 (April 04 ~March 05) :

In the backdrop, of Q1 FY06 results being announced, we have summarized the performance of three Indian software giants TCS, Wipro, Infosys, in FY05 to enable our readers correlate the current results:

US remained the biggest hunting ground for Indian firms during FY 05 -- and the three software giants too had revenues of 60 per cent or more from that region. In Europe, Wipro (30 per cent revenue) leads the other two by 7-8 percentage points.

For the year FY05, TCS reported the lowest attrition of Eight Percent compared to Infosys at 10.5 % and Wipro 15%. One reason could be that TCS had more on-site work, which means more overseas stints for engineers. TCS had an onsite: offshore ratio of 61:39 compared with Infosys' 51:49.

TCS also derived a higher proportion of revenues from fixed price contracts at 52 per cent viz. 31 per cent for Infosys and Wipro's 22 per cent during FY05. And billing rates of Wipro were lower than its peers.

Infosys' margins had been the strongest at 32.8 per cent in FY05. Since rates at which companies sell their services are comparable, this means that Infosys had a better handle on costs.

The bread-and-butter business for all the three companies is the application development and maintenance services. It fetches Infosys 53 per cent of its revenues, while for Wipro it is 60 per cent and for TCS it forms a larger chunk of revenues at 72.5 per cent.

The rest of the business for the big three came from package implementation, consulting, infrastructure management, BPO and other services. Both TCS and Infosys have been expanding in the package implementation space. Here TCS is slightly better off, it gets 21 per cent of its revenues from PI while Infosys and Wipro earn 15.2 per cent and 11 per cent respectively.

Infosys claims it has demonstrated R&D skills in aeronautics and telecom embedded systems, and TCS says they have developed several tools and have applied for international patents for a security system for wireless networks.R&D is one of Wipro strengths, at the same time they are not over-exposed. Telecom accounted for just a third of revenues, down from 55 per cent a couple of years ago.

In FY05, Infosys added 35 clients to its above $10 million revenue list while TCS could add only 26. None of them was over-exposed to a single client except for TCS. General Electric, for instance accounts for about 14 per cent, of TCS's international revenues. Infosys appeared to be customer-focused while Wipro appeared to be more product-focused.

Though, the outsourcing industry is booming, but its fancy profit margins are unsustainable and will decline.The road ahead is likely to be tough with the increasing salary cost, visa charges and appreciating ruppee for these companies.

Forrester Research Warns Europe Will Face Looming IT Skills Deficit By 2006.

The combination of accelerating retirement rates with a significant decline in the number of European students graduating from IT-related courses leads many firms to fear an IT skills shortage beginning in 2006. However, the reality is more complex, according to a recent report by Forrester Research, Inc. (NASDAQ: FORR). In the future, companies will see their IT skills requirements shift away from technicians and more toward business-oriented profiles. They will continue to outsource more routine activities. This shift in the enterprise impacts education and recruitment. In theory, the educational system should be able to rapidly create new programs to train IT/business analysts, architects, enterprise program managers, and vendor managers - skills that firms expect to need in greater numbers in the future; however, Forrester believes that, in practice, this will take too long to meet company demands.

Richard Peynot , Senior Analyst at Forrester Research, states: 'Other sources of talent, such as service providers, also need staff with technical skills - and the lack of new IT graduates gives them cause for concern, too. All the evidence indicates that Europe faces a serious risk of a shortage of IT skills and Forrester believes that companies need to take action now to support long-term IT competency needs and to pay close attention to the implications of renewed competition for the best talents.'

While hiring is one way that companies try to tackle the problem of higher retiree numbers, Forrester also sees a new focus on training and education. In a recent survey of IT decision-makers from leading European economies, Forrester found that they plan to significantly accelerate spending on training between 2005 and 2007. The survey also shows that companies look to engineering schools and technology universities to provide more content in disciplines like business, management, finance, architecture, and contracts; 90% of respondents complain about missing disciplines or a lack of depth of content that the educational system delivers in these newly important IT domains.

Forrester reports that many companies don't renew 'routine' positions in development and operations simply because they will outsource them. This trend is particularly evident in the finance and public sectors. However, outsourcing does not mean simplification. Companies that opt for global or selective outsourcing can't afford to move all responsibilities and decisions to service providers. Security, enterprise and technical architecture, innovative solutions, new technologies, and evolving business remain critical challenges. The decisions should be made internally by people with high skill levels - positions that Forrester believes are not 'offshorable.'

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