Analysts: Offshoring Will Continue To Boom Despite Setbacks

Despite weaker financial results from a pair of top Indian services companies, a new research report that says most outsourcing deals are problem-plagued, and the recent theft of Citibank accounts by foreign workers, most analysts don't see an end to the offshore-outsourcing boom.

Last week, Infosys Technologies Ltd. said its revenue this year would fall between $2.04 billion and $2.07 billion, below analysts' expectations of $2.18 billion. On Tuesday, Tata Consultancy Services Ltd. said earnings for its fourth quarter ended March 31 dropped 34% to $107.8 million. Also on Tuesday, a Deloitte Consulting survey revealed that 70% of large companies that outsource IT or business processes had "significant negative experiences" with the effort. Earlier this month, several former employees of Indian business-process-outsourcing vendor Msource, a Citibank vendor, were arrested for stealing more than $350,000 from four of the bank's customers.

In spite of all that, analysts that follow the services market don't expect many businesses to pull back from offshoring. "There could be some blips, but the long-term factors that favor outsourcing are still in place," Gartner analyst Frances Karamouzis says. Businesses have little choice but to continue to outsource more and more IT work because they simply don't have the internal resources to meet their needs, she says. "Some big companies are still operating with green-screen applications because they don't have the IT people or the skills to move off legacy systems," Karamouzis says, adding that much of the work that is outsourced will be placed offshore because of price considerations.

As for the Citibank incident, Karamouzis notes that the perpetrators were quickly arrested and jailed by police. "It shows that India has modern, capable law enforcement," she says.

Adam Frisch, a UBS Securities analyst, also doesn't believe the outsourcing market is about to lose steam. "We do not think the fundamentals of a growing and still-nascent industry change in a three-month period," Frisch said in a report issued Wednesday. Frisch believes offshore IT services companies will continue to grow, particularly as they add new capabilities such as consulting and infrastructure management. On Monday, offshore application developer Cognizant Technology Solutions Corp. bought Chicago-based business-technology consulting firm Fathom Solutions for $19 million.

Frisch on Wednesday upgraded his stock rating on Cognizant from neutral to buy. Cognizant, Frisch said, will benefit in the long term from "offshore growth trends which remain very strong."