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Indian outsourcers deal with economic meltdown

With the U.S. economy in a bad state, Indian outsourcers are downsizing in preparation for a decrease in business.

The U.S. economic meltdown is driving some Indian outsourcers to downsize in preparation for a decrease in business. But is the situation as dire as it seems? IT outsourcing services may take a hit, but outsourcing companies can minimize the damage if they plan appropriately and prepare for the long winter ahead.

And, as companies go through mergers and acquisitions, IT infrastructures must likewise be merged, leaving open opportunities for outside contractors.

There's no doubt about it: IT spending is down. Gartner expects tech budgets to fall 0.2% next year, down considerably from its previous forecast of 7% growth over 2008. Indian outsourcers are preparing for the drop in revenue by cutting 25% to 30% of their workers, according to the Associated Chambers of Commerce and Industry of India.

But not everyone is worried. MindTree, a midsized IT services outsourcing company based in Bangalore with headquarters in New Jersey, has reported growth over the past three financial quarters. Scott Staples, CEO of IT services at MindTree, emphasized the need to be proactive, and he said he was cautiously optimistic as the downturn unfolded.

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MindTree's plan is to refocus on different industries and smaller, global projects, Staples said. He believes the market for big-bang $80 million to $100 million deals -- the type that companies like Hewlett-Packard and Accenture traditionally seek -- will be strained. More companies will now contend for smaller deals in the $2 million to $5 million range. That's where MindTree has been working for years.

While MindTree never had a strong focus on financial services -- a sector that's sustained a huge blow -- it will probably further limit activity in that sector going forward. "We're also investing much more in travel and transportation -- that's done really well for us. We're putting investment into the insurance industry as well, which is doing OK," Staples said.

"The positive news is that companies are looking to reduce costs at every nook and cranny," he added.

Gartner analyst Allie Young agreed. "[Indian outsourcers] have the advantage that new companies are going to be looking at outsourcing for cost benefits," she said. "Even though the down economy seems a little bit iffy, there's the value proposition of labor that will hold them in good stead." While Young recognized that the work the Indian outsourcers will get is not exactly what they want, as most want to be in verticals, she said she believes the more desirable jobs will come back with the economy.

As the industries prepare for mergers, acquisitions and the predicted end of an investment banking era on Wall Street, Staples pointed out that even turbulence means opportunities for some players.

For example, "Morgan Stanley is going to have to spend a lot of money on IT if they're going to become a traditional bank holding company," he said. "Someone is going to get that work."

The question is who that will be. Many remember Barack Obama's campaign promise to keep jobs in America by ending tax breaks for companies that send jobs overseas and offering incentives to employers who hire within the U.S. But Gartner analyst Partha Iyengar thinks that Obama's election could be positive for Indian outsourcers.

"Seeing what is good for the U.S. and hence the world economy, the stability that this result should bring to the global economy is significantly more important [than Indian outsourcers losing jobs to Americans], even from an Indian perspective," she said. Iyengar pointed out that the jobs Obama had planned to keep in the U.S. were in manufacturing.

"In a specialized field like IT, it is not just a matter of choosing to outsource overseas or not, but the issue of skills availability locally," she said. "It is increasingly clear that in many areas, the U.S. does not have sufficient skills to address all the needs of U.S. enterprises ... and there will be strong competitive imperatives to continue to find a good balance between offshore and domestic sourcing."

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