Embattled Europe is now a fan of offshoring

What on earth is going on in Europe? Countries such as Germany and France who have staunchly resisted sending jobs overseas are suddenly capitulating -- at least as far as the IT and software sector is concerned.

"European companies are now more amenable to offshoring because they are realizing that it is the only way for them to get efficiency," says V Balakrishnan, CFO and member of the board, Infosys.

"There is absolutely no resistance to offshoring in the UK which is the biggest market in Europe. In rest of the Europe like Germany and France, that is also changing," added Balakrishnan.

This change didn't just manifest itself out of thin air. The financial turbulence of 2008 combined with the precarious finances of many of the member states of the European Union have significantly altered the business climate in the region.

So much so that the pressure on enterprises to offer competitive products and services are forcing them to outsource more works to offshore IT and BPO services providers than they had ever done in the past. The situation had become grave enough to herald a never-seen-before trend.

"Corporates of course are considering doing more and more offshoring but even (trade) unions are becoming more open to it. They are not making too much noise because they realise that unless companies go offshore, they can't be competitive in this environment and may go bankrupt. Then, there won't be any jobs at all," said Mukesh Aghi, CEO of Steria India.

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Steria is a French IT and BPO services company which derives about 90 per cent of its revenues from Europe. The company has over 6,000 of its global workforce of 20,000 based out of India.

This is good for IT companies in India since Europe is the second largest market for Indian and offshore centric IT services companies -- the lion's share of their revenues coming from the Americas.

According to Everest Group, outsourcing spent in Europe in 2010 was pegged at euro 180-200 billion (about $260 billion going by the current exchange rate).

Even though the report on European outsourcing market for 2011 is not yet out, it is estimated to be in the range of euro 200 to euro 220 billion in 2011 as the market in 2011 was nearly flat or marginally up.

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Within Europe, UK is the largest market with a share of about 27 of the total outsourcing spent being made there followed by Germany with 26 per cent and France with 21 per cent.

The Benelux region in Europe which comprises of three countries -- Belgium, Netherlands and Luxembourg -- accounts for about 10 per cent of the total outsourcing market and Italy about 9 per cent. The remaining 7 per cent comes from Nordic countries like Denmark, Finland, Iceland, Norway and Sweden.

According to the industry leaders, the offshore-onsite ratio of outsourcing projects in case of a typical American customer is 70:30.

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In certain cases, the offshore ratio in contracts issued by some European companies, especially those located in English-speaking countries are even better than that of the US.

"In case of some of the pure commercials (non-government) accounts in Europe, we go to 80-85 per cent offshore, and in many cases we find that there are very progressive clients in Europe. In some ways, European clients are more comfortable about doing multi-country activities than the Americans," says Brian J Manning, President and MD of the US-based IT services and solutions provider CSC in India.

The Indian offshore delivery centres of CSC account for about half of its overall delivery. The US-headquartered company has about 23,000 of around 97,000 overall employees are located in India.

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In November last year, TCS bagged a $2.2 billion worth of IT outsourcing deal from UK-based pension firm Friends Life.

This is the company's second biggest outsourcing contract the first one being the $2.8 billion worth of outsourcing contract it won from Citigroup in 2008.

Again, earlier this month, the company clinched a multi-million Euro contract from Eoropcar, the car rental company in Europe, for managing the strategic IT operations of its French operations.

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Other Indian IT services players are also seeing wins in various European countries. In the quarter ended December 31, 2011, leading Indian IT services companies including TCS, Infosys and HCL have seen strong sequential revenue growth.

During the period, TCS grew 21.6 per cent in Europe over the previous quarter followed by HCL with over 19 per cent and Infosys at 18 per cent.

Of the 14 new clients Infosys added in Europe during the quarter, two were said to be over $500 million in size.

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Many of the large deals won by HCL Technologies in the quarter, many were from Europe. Four of the 10 large deals TCS bagged in the Oct-Dec quarter were from Europe while three were from the US.

"Definitely Europe has come a long way compared to being laggard in the past. It's now catching up with many of the other matured markets, probably out of necessity.

Surprisingly, in countries like France who are known to be extremely averse to outsourcing and offshoring, people are reporting more number of deals and seeing increase in clients' interest," says Gaurav Gupta, partner AT Kearney.

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So, is this outsourcing trend simply a momentary aberration thanks to the European crisis, or could it in fact show some legs? Industry experts say that IT outsourcing demand from Europe will continue to grow for a variety of reasons.

To begin with, the quantum of outsourcing being done by most European countries, except the UK, is quite low.

Then there's the fact that the growth in demand from Europe has been driven by a number of first time outsourcers who had never looked at offshoring as an option in the past. Plus, existing clients are ramping up their engagements with the IT services vendors.

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Still, Europe can and will not -- in the foreseeable future -- be a substitute for the US. "In the end of the day, the US is still the biggest IT market. So, I don't think it will get to a point where the European and the US markets will be the same," said Partha Iyengar, VP and distinguished analyst at (for) Gartner.

"I don't think one will be a replacement for the other, but it (Europe) will be a strong source of growth in the near to medium term," he however added.

That's good news for Indian IT companies hoping to mitigate their risks and grow their revenues in what has been a volatile economic era.