Profiting from Europe's pain

Tata Consultancy Services (TCS) CEO N. Chandrasekaran has always been quick on his feet. No wonder then, as a cash-strapped UK government was looking for ways to cut costs early this year, TCS was among the first to knock on its doors. In mid-February and early March, senior executives from India's top information technology (IT) outsourcer were in talks with the Personal Accounts Delivery Authority, or PADA, for a possible $800-million (Rs 3,680-crore) tech outsourcing deal.

Chandrasekaran personally spearheaded the campaign, expending weeks before finally hitting pay dirt with the government agency. PADA administers the National Employment Savings Trust, a national pension scheme covering some seven million people. The TCS-PADA deal is, perhaps, one of the largest from Europe's insular government agencies, traditionally used to keeping much of their work inhouse.

DESTINATION CONTINENT Europe's public sector holds promise… Government agencies spend over $80 billion annually on outsourcing. Cost cutting spree could see a big jump in outsourcing budgets. Proven global delivery model gives Indian companies an edge. Government agencies are exploring partners for joint ventures. ... but it won't be smooth sailing. Public sector may prefer to deal with local outsourcers. Several projects bogged down by data security and job loss concerns. Expect repeated contract renegotiations to pare costs. Shipping jobs to offshore locations is frowned upon.

In a way, it's emblematic of the troubled times on the Continent. The economic meltdown has impelled governments to cut costs sharply. According to data from the European Union, all but one of the group's 27 members are running a deficit well over three per cent of GDP, the limit prescribed by the EU itself. In Britain alone, the budget deficit has ballooned to around 11 per cent of GDP, leading freshly-minted Prime Minister David Cameron to ring in the biggest round of budget cuts since World War Two. In Germany, the budget deficit has increased to 5.5 per cent of GDP, pushing Chancellor Angela Merkel to follow Britain's lead.

As a result, government agencies like PADA of the UK are performing a policy somersault of sorts and considering outsourcing — from within Europe and even beyond — to streamline operations and become leaner and more efficient. "If service providers can take 15-20 per cent or more off your annual IT operational costs or 7.5-10 per cent off your total IT spend, why wouldn't you try it?" reasons Jessica Hawkins, Associate Analyst at tech research agency Ovum. Small wonder, then, that outsourcers like TCS, Wipro Technologies and Genpact have all set sail for European shores.

And there does appear to be a large enough — and relatively untapped — market for outsourcers to chase across government agencies in Europe. According to estimates from a clutch of offshore advisors, public services companies across Europe forked out a staggering $80 billion (Rs 3.68 lakh crore) on IT and business process outsourcing (BPO) contracts last year. It's seven times what the Indian government will spend on the Bharat Nirman programme this fiscal. This could potentially double in the next five years as the outsourcing drive gains traction with countries like the UK, France, Italy, Germany and Spain likely to account for roughly two-thirds of the market.

Says Uma Mahesh, Vertical Head, Government and Education, Wipro Technologies: "European public sector firms could use a combination of outsourcing and emerging technologies such as cloud computing to cut costs." Industry experts, such as Duncan Aitchison of outsourcing advisory TPI, say that this trend will follow the northsouth divide in Europe, with Britain taking the lead, followed by the Netherlands, the Scandinavian region, and then other countries like Germany opting to first outsource, and then offshore, IT and BPO work.

So, here's the challenge for Indian companies. They will need to build an onsite presence and work with local bodies to prove that jobs won't be shipped overseas and instead, conversely, outsourcing will create fresh employment locally. "The first step will be about outsourcing and not offshoring… vendors need to prove they can consolidate assets and improve efficiency," says A.S. Lakshminarayanan, Head ( Europe), TCS.

Already, global vendors Capgemini and Steria are showing the way by setting up joint ventures with local government bodies, primarily in Britain, buying out captive centres and expanding their onsite presence in countries such as the UK and Germany. "The issues of job loss balanced by costs saved are tricky to achieve," admits Sachdev Ramakrishna, Director (Marketing), Steria, which set up a joint venture with Britain's National Health Service, or NHS.

In this instance, the two companies set up a central body to autonomously take decisions on which place to locate a centre, how many people to hire, and which tasks to possibly offshore for even greater cost saving. "This has worked well for us," says Ramakrishna, "we returned $1 million (Rs 4.6 crore) to NHS as savings from this contract and we've successfully transitioned work offshore."

Indian companies are walking down the same road. TCS, for example, has over 3,000 people in the UK and continues hiring. FirstSource, a BPO provider, has just opened a delivery centre in the UK to target local government contracts.

More companies are expected to follow suit. Genpact is interested in projects across Europe, especially in the UK, and, possibly, in Germany and France. As is Wipro. "Wipro has worked with governments in the US and India and we continue to pursue opportunities in UK and the European public sector and are confident of our prospects," says Mahesh.

A host of other IT and BPO companies, including Infosys Technologies, Patni Computer Systems and WNS, have plans on the drawing board. Says Keshav Murugesh, CEO of WNS: "We have delivery centres in the UK and Romania to tap this opportunity and we will sell directly and also look to align with partners." Competition will be stiff from European vendors who already have the first-mover advantage with a few pilot projects under implementation.

But Indian companies have their own USP. Points out Sridhar Vedala, Managing Director of offshore advisory Quantum Step: "Indian vendors are ahead of many European peers because they have a proven global delivery model."

There are problem areas. Public services firms are notoriously bureaucratic in their outsourcing plans and can take up to two years to decide on contracts. Then, as happened in the TCS-PADA deal, government contracts are often slowed by contract renegotiations and intense public scrutiny. It's the reason why despite being bullish on their prospects, key outsourcers such as Wipro and Genpact are yet to win their first contracts in this market, and others, too, are at best piloting small contracts with European public services agencies. The success of TCS, and other foreign players, though, will keep everyone interested.

"The key challenge for IT companies is to understand how the government works, how decision making is done and how processes are handled, particularly in the European Union. TCS is looking to expand its public sector portfolio," says Lakshminarayanan. As evidence of TCS's strength in the European public sector market, he cites two key deals it has bagged — with the European Commission for business transformation and infrastructure services and Cardiff Council in infrastructure management and support.

While Europe's debt crisis has created lucrative new opportunities for outsourcers, the challenges for India's IT and BPO firms make for firsts in many ways. And they are not going to be alone in the market for long.