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IT Services: The News Flow
H1B Visa Demand, FY11 Federal Budget, Strategy for
SMid Cap Firms, Indian BPO Estimates, and Pricing in
Healthcare Consulting
We summarize and analyze relevant IT services news from Thursday, March 31,
through Wednesday, April 13. Included are announced contract awards, top news
items, and summary valuation metrics.
• Visa applications declined significantly. The number of initial H-1B work
visa applications declined significantly this year relative to the last year. The US
Citizenship and Immigration Services received 5,900 initial applications this
year (vs. last year's 13,500 and an annual cap of 65k). We believe lower
demand for H-1B visas does not indicate weak demand and/or hiring trends but
stems from increased regulatory oversight of H-1B visa practices, hiring of
locals/existing visa holders in the US, and a potentially increased use of other
visa types (such as L visas).
• FY11 spending bill likely to pass, although federal ITS remains challenging.
The US Congress passed the FY11 spending bill to fund federal agencies
through the end of this fiscal year (i.e., Sep). The bill goes to the president for
signing and includes $38B in spending cuts relative to existing levels. We
believe the bill avoids the worst outcome of a government shutdown for federal
IT services contractors, but FY11 cuts and uncertainty around spending levels in
the FY12 budget should hurt near-term agency spending. CSC has the highest
exposure to the US federal government in our coverage universe.
• Competitive strategy for small/mid cap firms? The Everest Group believes
small/mid-cap IT services/BPO firms should focus on a niche market segment to
effectively compete with larger firms. However, focusing on just one niche
vertical also increases a vendor's risk in an event of slowdown/downturn in the
chosen client-industry. Overall, we believe a focused strategy makes sense and
the appropriate number of verticals/segments a vendor should focus on depends
on its size and management breadth. We like SYNT for its focus on financial
services and healthcare verticals (generates ~90% of its revenue).
• Encouraging estimates for Indian BPO industry. Gartner estimates India's
local BPO industry will increase to $1.4B in CY11 (from $1.1B last year),
growing at 23%. The growth is expected to be particularly strong in the telecom
vertical, although other verticals are also increasingly outsourcing BPO services.
The research firm also estimates an encouraging 20% CAGR over the next three
years. These growth rates and expectations are also likely leading various
offshore BPO providers to increasingly focus on the Indian market.
• Pricing challeneges in thehealthcare consulting industry. Kennedy consulting
believes growth outlook of the healthcare consulting industry is improving,
although pricing pressure is unlikely to ease over the near term. The research
firm attributed the pricing pressure to increased competition among consultants
and clients sophistication. Many clients have also centralized their procurement
function, which has decreased the fees and impacted terms of engagement.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IT Services: The News Flow
H1B Visa Demand, FY11 Federal Budget, Strategy for
SMid Cap Firms, Indian BPO Estimates, and Pricing in
Healthcare Consulting
We summarize and analyze relevant IT services news from Thursday, March 31,
through Wednesday, April 13. Included are announced contract awards, top news
items, and summary valuation metrics.
• Visa applications declined significantly. The number of initial H-1B work
visa applications declined significantly this year relative to the last year. The US
Citizenship and Immigration Services received 5,900 initial applications this
year (vs. last year's 13,500 and an annual cap of 65k). We believe lower
demand for H-1B visas does not indicate weak demand and/or hiring trends but
stems from increased regulatory oversight of H-1B visa practices, hiring of
locals/existing visa holders in the US, and a potentially increased use of other
visa types (such as L visas).
• FY11 spending bill likely to pass, although federal ITS remains challenging.
The US Congress passed the FY11 spending bill to fund federal agencies
through the end of this fiscal year (i.e., Sep). The bill goes to the president for
signing and includes $38B in spending cuts relative to existing levels. We
believe the bill avoids the worst outcome of a government shutdown for federal
IT services contractors, but FY11 cuts and uncertainty around spending levels in
the FY12 budget should hurt near-term agency spending. CSC has the highest
exposure to the US federal government in our coverage universe.
• Competitive strategy for small/mid cap firms? The Everest Group believes
small/mid-cap IT services/BPO firms should focus on a niche market segment to
effectively compete with larger firms. However, focusing on just one niche
vertical also increases a vendor's risk in an event of slowdown/downturn in the
chosen client-industry. Overall, we believe a focused strategy makes sense and
the appropriate number of verticals/segments a vendor should focus on depends
on its size and management breadth. We like SYNT for its focus on financial
services and healthcare verticals (generates ~90% of its revenue).
• Encouraging estimates for Indian BPO industry. Gartner estimates India's
local BPO industry will increase to $1.4B in CY11 (from $1.1B last year),
growing at 23%. The growth is expected to be particularly strong in the telecom
vertical, although other verticals are also increasingly outsourcing BPO services.
The research firm also estimates an encouraging 20% CAGR over the next three
years. These growth rates and expectations are also likely leading various
offshore BPO providers to increasingly focus on the Indian market.
• Pricing challeneges in thehealthcare consulting industry. Kennedy consulting
believes growth outlook of the healthcare consulting industry is improving,
although pricing pressure is unlikely to ease over the near term. The research
firm attributed the pricing pressure to increased competition among consultants
and clients sophistication. Many clients have also centralized their procurement
function, which has decreased the fees and impacted terms of engagement.
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