Cognizant Cuts Forecast, India?s IT Outsourcing Industry Under Pressure

Cognizant, the US company with about 70 percent of its workforce based in India, has lowered its revenue guidance for 2012 to $7.34 billion from $7.53 billion forecast earlier.

Due to a slower than anticipated acceleration in demand as we entered the second quarter, we are adopting a more conservative stance for the remainder of the year and revising our guidance to at least 20% revenue growth for 2012, Cognizant Chief Executive Officer Francisco D'Souza said in a statement Monday.

The continuing debt crisis in Europe and the tentative US recovery have hurt the outsourcing sector in India. While overall demand for IT services will continue to grow in 2012 as productivity efficiencies from IT are now a well-accepted reality, the acceleration will not be so high due to the weak global economic condition.

Wipro, India's third largest IT services provider, in April forecast a slower growth in the next quarter with the global economy continuing to be weak.

Infosys Ltd and Tata Consultancy Services (TCS) also announced their quarterly results in April. TCS, the largest IT services provider in India, met market expectations with a 30.5 percent increase in revenue and $558 million profit. Infosys reported a 27 percent rise in its fourth-quarter consolidated net profit but set a weak dollar revenue forecast for the current fiscal year.

The outsourcing sector in India is faced with several challenges, including severe global competition, acute challenges in sourcing talent and increased expectation by customers for innovation in technology and business processes.

Adding to these challenges are the stringent criteria to be in the basket of consideration by clients, increasing labor protectionism and increasing number of innovative mobile and tablet apps that reduce the relevance of traditional software systems.

In a downturn, IT outsourcing projects could get impacted due to business declines and freeze in decision-making from economic uncertainty. From a macro perspective, the situation with the US and the various economies in Europe could certainly affect volumes of outsourcing to India.

The slowdown can be largely due to business declines faced by clients rather than a freeze in decision-making due to uncertainty in the economic outlook of some nations. Some clients might postpone decisions, waiting for clarity in their environment.

The situation in the US, which is the largest contributor to the volume of IT business, will be the more critical factor compared to the economic slowdown in Europe.