Indian IT comes of age in Europe
(M2 PressWIRE Via Acquire Media NewsEdge) Paris -- Five years after the Indian IT companies began focusing on the European market in a serious way, despite, and partly because of, the global economic crisis, their efforts have begun to bear fruit. According to an analysis by the leading research and consulting firm Pierre Audoin Consultants (PAC), they still have a long way to go. In PAC's view, the real growth opportunities for the Indian players will lie in Germany and France in the future.
As 2013 begins, the Indian IT services companies can look back at 2012 with some degree of satisfaction, at least as far as the European markets are concerned. For the market leader, Tata Consultancy Services, the quarter ending 30 September 2012 was very strong, and so was the December quarter. Even Infosys, which had been suffering and showing a below-par performance, surprised analysts with a strong performance in December. HCL Technologies emerged with surprisingly good results throughout the year, which makes it a strong challenger for the position currently occupied by Infosys and Wipro, the number three and number four players in the Indian IT services market, behind TCS and Cognizant Technologies.
"For all the companies, one of the key markets impacting their performance was Europe, and contrary to the predictions made in 2011, the economic crisis in the euro zone did not translate into a slump in business for the Indians. Instead, it turned out to be a positive factor. Even markets such as Germany or France, which have traditionally been more reluctant towards offshoring, are showing signs of opening up to the idea of outsourcing IT services to India as a way to keep their costs under control and gain greater flexibility in light of the increasingly volatile markets in the euro zone and beyond," says Christine Nayagam, Senior Consultant specializing in Indian IT strategy at PAC.
Not surprisingly, the last quarter of 2012 saw a fair bit of activity by the Indian information technology services companies in continental Europe, notably in the DACH countries (Germany, Austria, Switzerland). Infosys, the third largest player, acquired Zurich-based Lodestone for EUR 350 million. Lodestone brings more than 200 clients from industries including manufacturing, automotive and life sciences to the Infosys pool of over 700 worldwide clients. Post-acquisition, the combined consulting practice focusing on SAP applications will generate revenues of more than USD 1 billion, thus firmly establishing Infosys amongst the global leaders in SAP consulting. Cognizant, the number two player, recently announced the acquisition of six IT consulting and services firms belonging to the Hamburg-based C1 Group, with a focus on manufacturing and logistics, energy and utilities, and financial services. The takeover strengthens Cognizant's presence in Europe, giving it a bigger footprint in Germany and Switzerland.
Capture the European opportunities
The trend to accept offshoring in Europe is expected to become stronger and more widespread in 2013 as the year looks set to be the worst period for the euro zone since the crisis began in 2008. This is likely to push businesses throughout the zone to take more drastic measures to stay afloat. Most Indian IT companies seem to have understood this reality and are trying to come up with strategies and ideas to capture this new business that promises to shore them up even while the US economy begins to get back on track.
Of the three key European markets - Germany, France, and the UK - the first two countries offer the best growth opportunities. The UK already contributes significantly to the overall revenue base for most Indian IT firms. It must be pointed out that the Indian providers continue to win fairly good-sized deals both from the public and private sectors. Notable among these is the multi-year contract that TCS signed with the UK Home Office to manage the technological requirements of the newly formed Disclosure and Barring Service (DBS). The contract with an initial tenure of five years is worth nearly USD 230 million and could be one of the largest deals the company has secured in Europe in recent years. But also other players of varying sizes have reported wins in this market.
Lured by these deals, for over three decades now, the Indian IT companies have been too focused on the US and UK markets. But this has come at the expense of other, equally promising markets in the European Union, notably Germany and France. The investments the Indians made in the UK and the focus they put on the UK market are many times greater than those made in the other large countries of the EU.
Focus on France and DACH
In the wake of the economic crisis that hit the world, Indian IT players increasingly found their growth limited due to their overdependence on the two principal markets, US and UK. Today, the growth opportunities for Indian IT services providers in the UK market seem rather limited given their market penetration and saturation levels. Moreover, the UK economy is headed for another difficult year and the conservative-led coalition government has been talking a lot about protecting British jobs and cracking down on immigration and even short-term employment visas. Hence the Indians may be struggling to maintain the share of business coming from the UK in their overall revenue stream in the year 2013.
Over the last five years or so, the Indian IT firms have begun to look more seriously at the opportunities in Germany and France, mainly in an attempt to hedge against receding business from the US and UK. The share of revenues from the UK, as part of overall European revenues, has been declining since 2010, while continental Europe has been increasing its share.
Even if the UK remains a key source of revenue for Indian IT players (more than 50 percent of overall European revenues), in PAC's view, the real growth opportunities for the Indian players will lie in Germany and France in the future. While Germany is already becoming a sizeable market, with several companies generating nearly 5-6 percent of their total revenues with the EU's largest economy, France is still way behind, accounting for around 0.5-0.75 percent of total revenues. Hence the Indian players can potentially increase their revenues from Germany and France to several times the current levels. "What is needed for these two countries is a better strategy, coupled with appropriate investments and the right local talent, which can really open the market for the Indian players. The acquisitions made by Cognizant, Infosys etc. clearly point towards this trend as they allow these companies to immediately gain a bit of all the three elements currently missing from their portfolios," adds Christine Nayagam.
Among the key sectors where Indians are strong are manufacturing (strongest vertical for Wipro and Infosys) and financial services (HCL). Compared to the market size, all Indian IT players are also very well positioned in telecommunications and retail.
Acquisitions remain a good way for the Indian players to grow in Germany and France in order to gain traction and market share in the euro zone, and they have been taking appropriate steps, albeit rather slowly so far. "This may just be the start of the buying season for Indian IT providers, and we can reasonably expect to see more deals in the year 2013," concludes Christine Nayagam.
Additional information about Indian IT in Europe can be found at the PAC Blog: http://blog.pac-online.com/author/christinenayagam/ About Pierre Audoin Consultants (PAC): From strategy to execution, PAC delivers focused and objective responses to the growth chal-lenges of Information and Communication Technology (ICT) players.
Founded in 1976, PAC is a privately held research & consulting firm for the software and ICT services market.
PAC helps ICT vendors optimize their strategies by providing quantitative and qualitative market analysis as well as operational and strategic consulting. We advise CIOs and financial investors in evaluating ICT vendors and solutions and support their investment decisions. Public institutions and organizations also rely on our key analyses to develop and shape their ICT policies.
For more information, please visit www.pac-online.com
PAC's top analyst views: http://blog.pac-online.com
Author: Christine Nayagam, Tel: +33 (0) 01 80 95 68 62
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