Infotech cheer

The second quarter results declared by the IT services majors have been extremely positive so far. Coming at a time when the debate over outsourcing has become an issue in the US presidential poll, one cannot but surmise that the brouhaha may, in fact, have helped increase the visibility of Indian IT and BPO companies in the developed markets.

The results show several encouraging trends. First, margin pressures seem to have been contained and billing rates are stable. This means Indian companies are no longer seen as just a labour cost arbitrage opportunity.

Price undercutting by competing vendors is on the wane; they are also becoming increasingly adept at countering pricing pressure by offering more value-added services. The rise in revenues against the backdrop of flat overall IT spending also demonstrates that Indian companies are gaining marketshare.

The second pointer from the initial crop of results""mainly Infosys and TCS""suggests that offshoring has gained as a proportion of total revenues, which again is good for margins. Third, the trend in rupee appreciation has been arrested.

Fourth, Infosys' higher guidance in both revenues and profits is a clear indication that the good results will continue for a while. In view of the well-known conservatism of the company and its penchant for understating its projections, that's a great comfort.

Although the TCS management has not offered any revenue guidance, it too has indicated that it is confident about the future.

The rate of hiring, with Infosys adding 5,000 people in the last quarter and TCS 4,000, is a clear indication that these companies expect strong demand to continue. They also seem to have no issue with US visa restrictions.

Yet another encouraging trend has been the continued increase in new clients""some of whom have, in fact, brought in business at higher billing rates.

Indian IT companies are also mining their existing clients better, as indicated by the fact that average client size has been growing. They have been able to do so by offering new verticals to clients and by expanding in new regions.

Japan and China are examples of new geographies that Indian IT players have moved into. Indian companies have also expanded their service offerings in areas such as BPO consultancy, infrastructure services and engineering services.

Economies of scale are kicking in as companies become bigger. The "global service delivery" model has proved to be a clear winner.

Won't the probable slowdown in the US have an impact on IT services companies? During the last tech boom, the logic offered was that a slowdown might encourage US corporates to cut costs further through more offshoring.

That logic didn't work, but it may be different this time. Indian IT companies have progressed far along the learning curve since Y2K; the range of services offered is much broader and their visibility is far greater.

But with many MNCs also shifting production to India, competition will intensify further. This has already led to several cross-border mergers and acquisitions, and the trend is likely to continue.