IBM &Vodafone discuss Indian outsourcing

IBM aims to grab more outsourcing deals from Indian telecom 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 6 million users a month, and telecoms companies are stepping up investment on technology. India had 130.6 million mobile subscribers on the popular GSM platform at end-May.

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“My feeling is that in the next 18 months, at least two more operators should be settling for outsourcing,” Vivek Gupta, director of communications sector at IBM India and South Asia, told Reuters in an interview.

“We would be extremely disappointed if we are not the key player there. From my perspective, I want to grab 100 percent of the business.”

International Business Machines Corp. of Armonk, New York, is in talks with unlisted Hutchison Essar Ltd., in which British phone firm Vodafone bought a controlling stake this year, for an outsourcing deal, Gupta said.

He did not give details.

Last year, Vodafone outsourced key IT functions to IBM, the world’s largest technology services company, and Electronic Data Systems Corp.

IBM, which employs 53,000 staff in India that accounts for 16 percent of its global workforce and makes it the company’s second-largest operation after the United States, has been winning large telecoms outsourcing deals in India.

In March, India’s fifth-largest mobile phone firm, Idea Cellular Ltd., signed a 10-year pact to outsource some of its operations like managing IT infrastructure and billing services to IBM in a deal valued at up to $800 million.

On Thursday, IBM said it had signed another 10-year deal worth $53 million with Idea for an interactive voice response transformation project.

IBM had signed a 10-year, $750 million, deal in 2004 with top mobile services firm Bharti Airtel to manage its IT infrastructure. It is now estimated to have gone up to about $1.5 billion due to robust growth in Bharti’s subscriber and revenue.

“Telecom is a very fast growing market in India and this is bringing in enormous opportunity… Our intent is to grow outsourcing business in India with rest of the telcos also,” said Gupta.

“Since the market visibility is very high (and) customers are giving very good reference about us, I think we should be increasing our market dominance for India much more in future.”

IBM’s business in India grew 37 percent in 2006, making it the company’s fastest-growing country operation, as telecoms, banks and government departments ramped up spending on computer hardware and services.

India to be hub of KPO industry

It’s the sector that holds most promise in the outsourcing pie. And now a report predicts it’s poised for big times ahead. The report says the knowledge process outsourcing industry (KPO) will be worth $16.7 billion by 2010-11. With an annual growth rate of 39% for the next four years, it will grow even faster than the BPO sector globally. What’s more, while in 2006-07 KPOs employed 106,000 professionals worldwide, their numbers are expected to grow and touch 350,000 by 2010-11.

But the real good news is for India. India will be the future hub of KPO sector and competitors — China, Philippines, Russia — will be spokes of the industry. These predictions are made by Alok Aggarwal, chairman Evalueserve in his yet to be released report, ‘India’s Knowledge Process Outsourcing Sector: Origin, Current State, and Future Direction’.
“There is a substantial momentum in the growth of KPO industry in India and although attrition is becoming quite poor, there are still enough new graduates that are joining this industry who can keep this momentum going,” says Aggarwal.

Its earnings went up from $1.2 billion in 2003-04 to $4.4 billion in 2006-07 — that is an annual growth of 54% worldwide. Similarly, the number of employees too grew from 34,000 in 2003-4 to 106,000 in 2006-07. In comparison, BPO revenues moved from $7.7 billion in 2003-04 to $15.8 billion in 2006-07, that is an annual growth rate of 27%. In the next four years, it’s expected to grow at 26% annually and generate $39.8 billion.

In India, KPOs employed around 9,000 professionals in 2000-01. By 2006-07 their numbers had scaled up to 75,400 generating $3.05 billion.

Aggarwal says, “KPO growth was triggered in 2004 when the issues like attrition, health in the call-centre industry in India became evident. In fact, KPO growth too can be hindered significantly by attrition, and it may come down from a projected revenue of $11.2 billion in 2010-11 to $9.9 billion or even lower if attrition continues to be a big problem. “As for competitors, probably the Philippines would be the closest followed by China,” he added.

KPO is likely to be driven by factors like breadth and depth of coverage, domain expertise, location advantage, sales and marketing capabilities etc. Therefore, it is quite likely that firms both with own captives and those using third party vendors may use a ‘hub and spoke’ model where a provider in India may constitute ‘centre’ whereas other units in the world may provide appropriate ’spokes.’

Pharma sector gains from Re-rise

The appreciation of the rupee might have brought in its share of woes for exporters and traders alike, but for the pharmaceutical sector with in-licensing agreements in place, its time to make hay. Even as the IT, jewellery and textile firms are tearing at their hair with each rise of the rupee and the consequent load on their revenues, several domestic drug firms are laughing all the way to the bank.

Several domestic firms such as Ajanta Pharma, IPCA Labs, Lupin, Elder Pharma and Nicholas Piramal have benefitted due to the rupee appreciation. While Elder has some 28 deals in place, Ajanta Pharma and IPCA are in to technology transfer and Lupin is involved in bringing in raw material, so all the firms score. Since Nicholas Piramal also exports its drugs, the effect is not that dramatic.

Analysts said that companies that have adopted an in-licensing model are in for a windfall of at least 18-20% (the same as the percentage fall in dollar against the rupee) as they pay out hefty amounts for purchase of raw material from the international partner. The full impact of the swell in profit would be visible during the current year.
Since the purchase of raw material is fixed in dollar terms, slide in dollar has taken the wind out of the sail for most MNCs. For example, an Indian drug company which has to pay, say $1,00,000 towards purchase, would have paid Rs 48-49 lakh a year ago. Now, the firm would have to shell out only Rs 40 lakh.

The Rs 9 lakh saving would kick into play for just one in-licensing agreement. Most domestic pharma firms have a minimum of five such agreements in place.

The in-licensing model allows a pharma company to manufacture and sell products of the foreign partner in India officially without any kind of patent infringement. It’s a win-win situation, since the Indian company is able to get its hands on the technological know-how, and in some case, the raw material too, while the foreign company is able to get a toe-hold in the huge Indian market.

Alok Saxena, director, Elder Pharm said, “We have about 28 in-licensing deals in place. Almost 45% of turnover comes from more than 65 in-licensed products. Given the scenario, we would be able to show better margins and net benefit to bottomline, as our forex outgo shall decline and the cost of our products will become cheaper.”

Nicholas Piramal’s CFO, N Santhanam gives a different take. “We have some in-licensing agreements in place, but they don’t form a very large percentage of sales. Though some companies are in the US, in terms of in-licensing pacts, revenues would be less than 2% of sales.”