Offshore outsourcing: The latest mileposts

Infosys Technologies reported its fiscal first quarter results on Wednesday and provided a few notable data points on the state of offshore outsourcing.

First off, Infosys was dinged a bit by the strength of India's currency, the Rupee vs. the U.S. dollar. This development isn't too surprising since the dollar is weaker against most currencies these days. In any case, Infosys had to trim its outlook. For the quarter ending June 30 the company reported earnings of 46 cents a share on revenue of $928 million. Revenue was up 40.6 percent from a year ago.

The upshot for Infosys is that margins get squeezed a bit since it's taking revenue in U.S. dollars in most cases and paying workers in Rupees. While the Rupee situation got a lot of play yesterday Infosys says it has enough wiggle room to manage its profit margins.

Instead of currency worries there were a few notable items that stood out on the Infosys conference call. We'll see if these topics surface again as other offshoring firms such as Wipro report earnings.

Here's a look at some of the offshore outsourcing developments mentioned by Infosys:

North American companies accounted for 62.6 percent of revenue for Infosys with Europe representing 26.8 percent. If Infosys can get its Europe revenue up its Rupee problems will go away quickly. Don't be surprised if Infosys starts pushing for more Europe deals.

By service, development and maintenance accounted for 40 percent of revenue. Package implementation was 18.4 percent of revenue with consulting bringing up the rear at 4.9 percent. Financials services was 36 percent of revenue followed by telecommunications at 22 percent.

Infosys has 509 clients with 285 of them with deals worth $1 million. There are 113 $5 million customers and one customer paying Infosys more than $200 million. Infosys has eight customers paying Infosys more than $8 million.

More work is being conducted on customer sites. Here's what CEO S. Gopalakrishnan had to say about the on site/offshore mix when asked.

"Regarding your question about what is the ideal onsite/offshore ratio. So around 50% is the ideal onsite/offshore ratio because you still need to remember that we have tax breaks in India and we have significant benefits because of that. I think when 2009 comes, 2010 comes, as some of the centers we have in India come off the tax holiday, then we need to look at what is the ideal onsite/offshore mix because today the significant driver will be based on the tax holiday we have.

Having said that, we are constantly looking at our business mix. Some of the services like enterprise solutions, even though they have a higher onsite content, today they're running at around 38%, 39% onsite, the margins are actually better than the company average. So we play around with that and that’s one of the levers we have in order to offset the rupee appreciation and the impact on margins. So we are leveraging our services mix in order to maintain our margin.

And some of the faster growing services are services like consulting, package implementation, et cetera., which have a slightly higher consulting, of course, is almost all onsite and the package implementation, as I said, is about 39%, 40% onsite."

Captives (offshore sites wholly owned by companies) aren't doing well.

Gopalakrishnan said:

Generally, captives are not doing so well in India. Forrester have put out a report that said 60% of the captives are actually not meeting its goals, have not given the value benefit expected. Costs are higher. Attrition is very high, etcetera. So, generally, captives are not actually doing that well.

Captives are an opportunity for us to look at integrating with Infosys, taking over that and running it for our clients, etcetera. When a client looks at setting up a new captive in India, sometimes we do help them set it up. Generally we don't like to do build, operate, transfer, etcetera, because there's no guarantee that the employees will move.