The words were slipped into Tata Consultancy Services' most recent earnings report, in June, like dressing on a salad but still drew a lot of attention from investors desperate for any sign of life in the dreary information technology sector.
The Mumbai IT outsourcing and consulting firm said North America had maintained its share of revenues aided by a "semblance of stability" in the banking and financial services verticals.
Not the most exciting prose, but it suggested a corner had been turned, helped in part by a major TCS acquisition that could become a blueprint for future business process outsourcing, or BPO, transactions.
"It's been a brutal year [for IT offshoring] that only began to recover in the June quarter, when it sounded like some bank spending was beginning to unfreeze," said Karl Keirstead, a senior equity analyst for software and IT services at Kaufman Bros. He added that TCS' competitors, like Infosys and Wipro, also have suggested a bottom. "The Indian software stocks all took off after that," he said.
A recovery is welcome news for TCS, whose stock fell almost 50% last year. Amid the volatility of that bleak year, it made a bold move, buying Citigroup Inc.'s India outsourcing unit, Citigroup Global Services, which added domain capability and a work force of about 12,000 — doubling TCS' head count and boosting its lead over Infosys and Wipro.
The $505 million deal was the largest ever for TCS, which edged out IBM Corp. and Capgemini to nab the Citi unit. It preceded a $2.5 billion contract to supply process-outsourcing services, application development and infrastructure support to Citi and its affiliates for the next nine-and-a-half years — the largest services contract ever won by an Indian company.
TCS made the deal amid changes in the larger offshoring business that have accelerated during the past year because of the recession. The bread-and-butter offshoring task — taking labor costs out of software development and maintenance for North American, Asian and European banks — is maturing. Most banks now bake into their balance sheets the labor-cost savings from offshoring. To maintain the heady growth of earlier years, offshoring companies must broaden their expertise and take on more sophisticated workloads.
"For traditional IT services, the offshoring market is slowing down," said Gwenn Bezard, the research director at Aite Group in Boston. "The opportunities are in BPO, where a company like Tata can integrate those IT services and BPO in a single offering."
In a written response to questions, N. Ganapathy Subramaniam, the president of TCS Financial Solutions, said that offshoring and outsourcing remain crucial for companies' efficiency and that the downturn had not affected the value proposition of offshoring.
"What has changed is the means to deliver the efficiencies and changed pricing models based on volumes, outcomes, risk/reward" and other factors, he said, adding that TCS also reaped benefits recently by offering merger-related services, such as systems rationalization, decommissioning and identifying opportunities for shared services, to financial institutions.
But it was TCS' deal with Citigroup that made the boldest headlines during the past year, shedding light on how offshoring companies can sell added cost containment to banks. Banks already offshore back-office administration to India but usually manage the function through captive firms. The Citi-TCS deal and the others sure to follow put more direct management responsibility in the hands of service providers.
"With banks going through turmoil, many banks — with Citi's sale to Tata being the first — are selling captive back-office units to third-party vendors such as Tata which then offer those services to their banks to drive growth," Keirstead said. "The next trend is probably for more of these Tata-Citi-type deals to take place."
