TechMarketView - UKHotViews

SQS logo Seven being the percentage of revenues that Cologne-based and London-listed testing services firm SQS currently derives from managed services, and 50% being where it would rather like to get to by 2014. Given that a year ago managed services was around 3% of revenues, it’s progress. Managed services is ‘goodness’, bringing with it better revenue visibility.

Indeed the news from SQS today was much brighter than earlier in the year (see SQS puts dampener on 2010 margins), with H1 turnover (to 30^th June) up 9% to €74m and gross margins up just over a point to 30.5%. However, increased staff costs and other G&A expenses pulled operating margins back 80bps to 2.4%.

On the other hand, most of the staff increase was offshore, which now represents 31% of SQS’ total headcount. This is an absolutely crucial metric. Testing services is highly offshoreable – as much as 90% can be leveraged on large projects. With the leading Indian SIs as fierce competitors, and most other European SIs likewise (notably Capgemini), SQS needs to get the offshore mix as high as possible as quickly as possible, especially given CEO Rudolf van Megen’s observation that “pricing pressures do remain”. You bet!

Infosys logo Some revealing insights from Infosys at a recent investor concall on the stark contrast between demand in Europe vs the US. Infosys COO, SD Shibulal, said that Infosys is “continuing to see growth in the US”, but “Europe is where the US was a couple of quarters back. The speed of decision-making (has) not really picked up.” He added that although (Continental) European firms are considering offshore as “a very, very viable option”, they are not making decisions.

On the other hand, CFO V. Balakrishnan noted that “the UK is much better off that the rest of Europe”, and that Infosys is seeing “good traction” in retail and manufacturing sectors. According to my estimates, Infosys’ UK revenues have actually been declining in each of the past six quarters on a rolling 12-month basis, and now stand at around £390m. It has to be said, though, that this is mainly the ‘BT effect’, as our ‘favourite telco’ is Infosys’ largest client.

Bala also pretty much ruled out making a concerted effort to get into the UK public sector market “in the near future”, due to the Government’s cost-cutting agenda – though I have always thought this actually gave the India-based players the best opportunity in a long while to strut their stuff. We’ll comment more about the ‘Indian onslaught’ on the UK public sector in a forthcoming PublicSectorViews research note. Interestingly, Infosys does not see the same barriers to entry in the US public sector, where they have recently appointed a sector CEO and will explore (initially) subcontracting opportunities. Bala also alluded to “opportunities coming on the way for M&A”, but frankly, they’ve been humming that tune for as long as I’ve been following them but have yet to burst into song.

In an unrelated news article, it was reported that Deutsche Bank is pulling back in house some of its BPO activities outsourced to Infosys. What really caught my eye about this was the comment that the 150 employees affected will apparently transfer to the DB captive at 50% higher salaries! The proverbial “source close to the development” said that “most are accepting this (DB) offer”. Can’t imagine why. I was aware that the Indian captives of MNCs (multinational corporations) pay more than the IT/BPO players, but I must admit I hadn’t appreciated that the wage gap was quite that high. No wonder all the Indian grads want to work for foreign banks! By the way, Deutsche Bank is a huge believer in offshore, and has had relationships (including shareholdings) with many of the India-based IT players going back yonks.

Articles tagged: offshore

Wednesday 8th September 2010

SQS and the journey from 7 to 50

Friday 3rd September 2010

Infosys: ‘Decision-making not picked up in Europe’