When seen in isolation, and not compared with global players, the Europeans seem to be going strong. Year 2006 saw the CRM market in Europe grow at 12 percent, as compared to at 4 percent in 2005, according to Gartner. But it is interesting to note that the CRM revenue of offshore pure-play providers is touching one fourth that of Europe’s largest providers. By 2010, Gartner predicts, “One of Infosys, TCS, or Wipro will have revenue half the size of one or more of Accenture, Deloitte, Capgemini, or IBM in the European CRM consulting and systems integration market.”

While the European providers are still leaders on the continent, this may be because the Indian IT-service providers were not expanding into Europe until very recently when the dollar hit an all-time low.
“I doubt if companies like Logica and Capgemini can compete with the Indian biggies,” says Andrews.
Victims of a Fragmented Market

Foreign players entering the European market, along with customers carving out deals among multiple providers, has resulted in the European IT and BPO service provider landscape being fragmented, with a lot of smaller deals going to smaller providers. “Atos Origin has been seeing stagnating revenues in the U.K. though its situation is slightly better in the Netherlands and France,” says Dobardziev of Ovum. This “is because there are no sufficient mega deals happening for the company,” he adds.

Bloggers Speak Out!

For this story, we posted a blog at globalservicesmedia.com and invited readers to participate in the story by leaving comments. Here are some comments from there.

Lack of Offshore Strategy IT companies in France, Germany and Belgium have three problems in adopting offshore: Their incentive systems do not encourage managers to send enough work offshore; the language and cultural gap between Europe and India is much bigger than that between the Anglo-Saxon world and India, making it difficult for companies to grow their operations in India; labor market inflexibilities and labor unions in  Europe make it difficult for these companies to run economically viable offshore operations. When we talk of companies buying services, we should not underestimate the importance of confidence and trust arising from past relationships. So it is not surprising to me that a European company should prefer a European provider for offshore work because the same provider has delivered onshore services in the past, and is familiar with the client’s systems, key managers and working culture.

Don’t Club Xchanging with the Rest We generically say Europe. But I think it has three distinct segments among developed markets: UK, which is fairly like the U.S.; France, Germany that are huge but not mature; and Netherlands, Switzerland etc that do not care about the origin of the providers. It is in the second category of the market that companies like T-Systems, Lufthansa Systems, and to some extent SBS, have  held market share. In these markets with stringent labor laws, the effect of offshoring has not yet been felt.  Xchanging started at the same time as other offshore vendors, and is today the world’s largest pure-play BPO firm.

Too Europe Centric Why are the European providers focusing only on low-cost centers in Portugal, the Czech Republic, Poland, etc. only? Why don’t they have an India strategy, which is a major center for IT/BPO services, and will remain so for another five to 10 years? Except Capgemini none of the others have an effective presence in India. Fall in their market capitalization has made them vulnerable for takeovers. Yet, their revenue per employee is still far, far better than that of Indian IT companies.

The market is in consolidation mode. In end of July U.K.’s Xansa was acquired by France’s Steria; and Royal Philips Electronics sold off its captive BPO center in Poland (along with those in India and Thailand) to Infosys BPO. Rumors about other acquisitions have been doing the rounds for several months: Capgemini was rumored to be up for grabs (by Atos Origin) in 2004, and again this year (by Infosys) in June. LogicaCMG was rumored to be a bid target by Permira, the private-equity group and Atos Origin by Permira, Centaurus and Blackstone.

We tried contacting Atos Origin, Capgemini, Steria, Xansa and Logica for their views. While Capgemini declined an interview, two weeks after the interview requests were sent off, as we go to press, we are still to hear from Atos and Xansa (or Steria — Xansa’s acquirer).

Logica is the only IT-services company that responded to our queries regarding its health, growth strategy and closed business units. Rubbishing all speculations on the company being a takeover target, the company’s India CEO Rahul Patwardhan reassured us of the health of the company. In February this year, the company divested its telecom-products division, a move seen by speculators as an attempt by Logica to bail out its diminishing business in the telecom space. But Patwardhan puts forth his view, “This divestment allows LogicaCMG to focus on its core strengths by using its industry and domain expertise, and business and technology insight to enable its customers to become more productive. The proceeds from the sale will be used to support a £130 milllion share buyback, to buyout existing minority interests and to pay own debt.”

As we go to press, a bit of good news for Europe. Allianz Global Investors signed a $600 million, eight-year deal with Xchanging for providing retail investment account-management services from Fondsdepot bank’s Hof facility.

On a different beat, Capgemini is trying to make its presence felt by leveraging the brand name and clientele of Kanbay, the firm it acquired some time back. While it’s a rare approach to expand in the geographies of your partner, it’s an attempt to become truly global. But would it be very late before other European providers can avert the storm? Only time will tell.