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Banks' losses TCS' gain in economic crisis

January 23, 2010 02:53 IST

Europe may continue to reel from the shock of the global financial crisis, but even in these depressed circumstances Information Technology-related outsourcing remains surprisingly buoyant to the benefit of Indian firms like Tata Consultancy Services.

Over the last three financial quarters, Europe's share of TCS' global revenues has thus held at between 26 and 28 per cent. This is a slight dip from the 29.5 per cent figure of the 2008-2009 fiscal, but still well ahead of the 20 per cent contribution Europe used to account for only five years ago.

The reasons, explains Kiran Gupta, TCS country manager for Belgium, are in part counter-intuitively to do with the impact of the economic recession on the banking and financial sector (BFS).

Some 45 per cent of TCS' revenues come from BFS. This was also the sector worst hit by the crisis. However, the regulatory and organisational changes forced on the sector following the downturn have actually created a range of opportunities for IT services.

"The way in which banks manage risk means a change in their processes in which IT can play a crucial role," says Kiran.

He cites a recent European Union directive that splits up bancassurance companies, a move that has affected almost every major bank operating in the Belgian market -- from ING to Fortis.

"It used to be the case that one division handled both sides (banking and insurance) with one system. But now, the IT systems involved have to be duplicated."

Finally, the intensive merger and acquisition activity in the BFS sector in Europe over the last three years is also creating new project opportunities for IT-related services.

Thus, despite the close-to-flat growth in the Belgian IT market in the last quarter, TCS has been able to add to its stable of clients which already included telecom heavyweight Belgacom, retail giant Colruyt and the world's largest maker of beer, InBev. It now counts nine out of the top 20 Belgian companies as customers.

"When the crisis first began, European companies went into a freeze. Unsure of what to do there was much hesitation in increasing offshoring projects," says Abhinav Kumar, TCS' director for marketing and communications in Europe.

"But gradually they came to realise that if they were to stay in business at all they would need to grab every opportunity to streamline their operations."

Thus, despite being traditionally averse to offshoring, a slow but steady change in mind set in continental Europe is discernible.

"Europe is coming to grips with the fact that there are no such things as truly local companies any more or at least these local companies can have no growth," says Kiran.

"Almost every profitable firm works with markets outside Europe and with an increasingly international employee base," so that the local-foreign distinction, once of paramount importance in the Continent is beginning to blur.

Kumar points to the fact that even in the notoriously domestic firm-dominated, $30-billion French IT services market, the large "local" players are increasingly employing Indians.

For example, French heavyweight Capgemini recently revealed that it will soon have more staff in India (21,000 upwards), than it does in its home market of France (about 20,000).

With old prejudices fading, continental Europe presents a whole new market for Indian IT.

"We have a lot of space to grow in this market," says Kumar, alluding to Germany and France, in particular.

Of the 27 per cent contribution of Europe to TCS' global revenue these last three quarters, some 16-17 per cent came from the UK alone. Continental countries thus represent a relatively meager portion of the TCS pie.

TCS' strategy to gain ground in this untapped territory is to develop a model that combines offshoring with localization.

The US model of almost pure offshoring is unlikely to work for Europe given its different culture. On the other hand, pure localization, a path TCS has taken in Latin America, for example, is not appropriate for Europe either, due to financial reasons.

"In Europe, we are going for a middle path," says Kumar.

With 12,854 new employees having been hired in the last quarter alone and a 38.9 per cent year-on-year increase in the profit margins of the company for the quarter, it's clear that TCS has weathered the worst of the economic crisis.

But, although much of its growth may have come from emerging markets rather than the developed economies, it should also be kept in mind that for IT, continental Europe, old and rich though it may be, is in fact an emerging market itself.

Pallavi Aiyar in Brussels