Top 10 Outsourcing Stocks
Anything I write about outsourcing seems to lead to a heated debate. My article on the Death of Indian Outsourcing was one such piece. The more recent Obama and Outsourcing received a similar welcome. Regardless of what happens to the outsourcing industry as a result of the U.S. elections in November, outsourcing firms will remain key contributors to a changing global economy. Here is my analysis of the top 10 outsourcing stocks to watch.
1. Accenture (ACN)
Accenture is much more than a plain vanilla outsourcer. It is a consulting firm that can handle multiple processes, applications, and infrastructure outsourcing in addition to having a global footprint. As Accenture (ACN) has expertise in management consulting, technical services and outsourcing, the company is one of the preferred vendors that can withstand the market turmoil due to currency fluctuations, salary hikes in India, etc. Its performance in Q208 and Q308 shows that the company knows how to handle competition and weakening market conditions. Accenture remains my preferred long-term investment.
2. IBM
International Business Machines Corporation (IBM) has not only built up a strong portfolio through acquisitions, but also boasts of a strong global model and a diverse portfolio of businesses. IBM operates in more than 170 countries, and more than 65% of its employees are based outside the U.S. So, it's no wonder that it continues to perform well despite the worsening economic conditions in the U.S. IBM also has a defined country strategy based on acquisition of service companies in the target country. The company’s Q407, Q108 and Q208 results are representative of its strength.
3. Hewlett-Packard
With strong international sales and cost reduction efforts driven by the able leadership of CEO Mark Hurd, HP (HPQ) is on a roll. It has managed not only to survive, but also to grow in markets like PCs that competitors like IBM have exited under pressure from China. With Hurd’s plans for acquiring EDS, the services portfolio is getting stronger.
4. Infosys
Infosys (INFY) could have been sold off for $1 million, but decided instead to grow into a $4 billion Indian IT services outsourcing enterprise. Infosys performs well primarily due to market slowdowns and tighter operating cost limitations on businesses in Western countries. However, the company has several tasks ahead of it in order to continue to perform:
- It needs to put a more developed strategy in place to address the software ecosystem in the U.S.
- It need to make a decision about a strategy that enables the company to play in the more leveraged technology/IP-driven business models.
- It needs to change the business mix and move out of pure body shopping to an SaaS and IP model.
- It needs to come up with a Wave 3 Strategy.
5. Wipro
Wipro (WIT) suffers from similar problems as Infosys. With labor arbitrage losing sheen, Indian IT industry players, which include Wipro, need to move into the SaaS and IP-driven model from its present body-shopping staple. If the company doesn’t do this, it will not be able to challenge the Accentures and IBMs of the world.
6. Tata Consultancy Services
Tata Consultancy Services, popularly known as TCS [TCS.NS], has shown its strength in operations by building a global network delivery model that delivers based on the same standards, methodologies, excellence and expectations used and followed globally. The company has grown rapidly through its acquisition binge over the past few years. However, like the other Indian IT majors, TCS still needs to find its SaaS and IP partners to mitigate the threats the Indian outsourcing industry faces.
7. Satyam
Satyam (SAY) has been diligently following a 4-step strategy to success: it is increasing the proportion of offshore services, reducing staff attrition, increasing new client revenue and maintaining relationships with existing customers, and increasing value to customers via integrated business solutions across functional areas and improved support for relationships. I also liked its rural BPO Initiative, which is a philanthropic endeavor to ship BPO projects to some of the 600,000-odd villages in India, dropping the cost structure further while creating jobs in India’s poverty-stricken heartland. This strategy needs to morph from a philanthropic effort to a full-fledged commercial scale.
8. Cognizant
Cognizant (CTSH) is a leading provider of outsourcing services with a focus on the pharmaceuticals sector. The company's acquisition of MarketRx pushed it further ahead in the vertical. Cognizant has been growing steadily through acquisitions, becoming stronger in both verticals and geographies, but its dependence on the financial services business is a concern given current market conditions.
9. ADP
Automatic Data Processing (ADP) is one of the most respected outsourcers in the fields of HR, payroll, tax and benefits administration. The company has grown to its $8+ billion size through strategic acquisitions focused on the above business segments. ADP is one outsourcing firm that realizes the importance of SaaS in the segment. Of late, the market conditions have been causing it some worry, but the company has weathered many such storms.
10. Paychex
Paychex (PAYX) is another outsourcer that has realized the importance of SaaS in the outsourcing industry. The company offers HR outsourcing services and payroll services through its core products: Paychex Premier Human Resources and Professional Employer Organization [PEO], Core Payroll, and Major Market Services [MMS]. I firmly believe that Paychex has huge potential, especially if it starts acquiring some SaaS companies.
Disclosure: None
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This article has 5 comments:
- IT watcheroo
- 1 Comment
My Website
Sep 04 09:03 AM- Vivs
- 1 Comment
Sep 04 11:59 AMI share the positive outlook on Paychex though :-)
- Seb
- 2 Comments
Sep 05 12:07 AMThis looks like a mish-mash of hearsay anecdotes from friends/relatives who work in these firms.
- Altima
- 1 Comment
Sep 05 12:31 AM- User 138602
- 102 Comments
Sep 05 11:39 AM