Information Services Group, Inc.
Q1 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Good day and welcome to the Goldman Sachs hosted First Half 2013 Asia Pacific ISG Outsourcing Index Conference Call. Today’s conference is being recorded, and at this time, it is my pleasure to turn the call over to Rishi Jhunjhunwala, from Goldman Sachs. Please go ahead, sir Rishi Jhunjhunwala - Goldman Sachs Thank you very much. Good morning everyone. This is Rishi Jhunjhunwala from Goldman Sachs India IT services research. And it is my pleasure today to host ISG for their first half 2013 Asia Pacific ISG Outsourcing Index call. So ISG is leading technology insights, market intelligence and outsourcing advisory company, helping more than 500 corporates around the world achieve operational excellence. So with the Indian IT services earnings season largely over and a key takeaway has been the uptick in discretionary spending. So with that backdrop we hope to get some good insights from our respected ISG experts. From ISG we have three partners as speakers for this call. I am going to turn it over to Mr. Sid Pai, the Partner & President for Asia Pacific who will introduce the ISG team, and then the team will go through the presentation. Following the presentation, which will last about 25 to 30 minutes, we will open up it for questions from participants. Sid sir, thank you for doing the call and over to you.

[Sid Pai:]

Thank you Rishi. Hello and welcome to the ISG Asia Pacific Outsourcing Index conference call. My name is Sid Pai and I am Partner & President for ISG’s business and operations in Asia Pacific. I am joined today by Dinesh Goel, Partner, ISG India and Tom McCormick Partner, ISG Australia and New Zealand. Tom will co-present the analysis with me today and will lead our commentary around the Asia Pacific market, while Dinesh will introduce today’s special topic. Today’s call is supported by Goldman Sachs and I would like to thank our host Rishi Jhunjhunwala and his team for their support. This is our 14th semi-annual Index Conference Call for Asia Pacific. More than a decade ago we launched the TPI index as it was then called to provide the regular snapshot of the health of the sourcing industry. Since that time the industry has undergone tremendous changes and we have too. Our new name for the index, the ISG outsourcing index reflects the importance of this community to ISG. As the leading technology insights market intelligence and advisory services company, we are uniquely suited to report on the global sourcing marketplace. The ISG outsourcing index will continue to provide the data and insights needed to help you and your organizations advice your plans confidently. Our special topic today, we will look at the conditions of the market that set the stage for deal flow in mergers and acquisitions. We have been tracking who is ready to move and why, and we will give you aspects to consider as you look at the potential for consolidation of the market. Just to remind you, our analysis today focus on private sector outsourcing contract with an annual contract value of greater than $5 million. However, later in the call we will take a quick look at the regions public sector market. If you are not already connected to the webcast, the slides we will cover today are on our website, www.isg-one.com. Please not that all monetary values provided today will be in U.S. dollars. Let’s begin now with some of our key global findings. The numbers are down across the board with weakness in the previous bright spots of Asia Pacific and (inaudible) BPO of particular note. Asia Pacific struggled over the half year against the especially tough 2012 compares. The half on half ball of 27% was mainly due to weakness in its two largest markets, Australia and New Zealand, and India. A shortage of sizable contracts caused BPO success to pause momentarily though good deal activity particularly in EMEA suggested that this is a blip in performance rather than a downward trend. The global market seems to be missing the very largest and the very smallest deals. Overall we've seen a 29% downswing year-on-year in mega relationships and ACV of the smallest contracts declined as well. That then left mid-range contracts to carry the market. That said, we do see reason for optimism. Service provider’s pipelines are up above levels of six months ago and they are reporting greater confidence levels. In our analysis for the first half of 2013, we look at the fact that would affect the market, which industries are struggling and how cloud and other forms of contracting have begun to nibble away at overall contract values. Let’s start as usual with the Global headlines which you will find on slide four. Looking at the broader market trends we see that the ACV of 8.5 billion was down 24% half-on-half. This was the third and deepest consecutive half-year decline. The 487 contracts awarded in the first half down from 526 in the second half of 2012 declined less sharply than ACV. We see that average contract size is continuing its downward trend. In all, the first half of 2013 was the worst half since we first saw the effect of the global recession in 2008. Slide five shows the regional view of the market for the first half of 2013. Before we start, can I remind you that our geographic measures represent where the buying decisions are made rather than where the work is performed or whether service provider is based. As you can see, market volatility is more pronounced in the Americas and EMEA as those regions seem to be more susceptible to the somewhat lumpy recovery from the global recession. In the Americas in the first half of this year, both the annual contract value and the number of contracts awarded dropped by around 15% compared to the second half of 2012. The region experienced a lack of mega relationship awards and also a steep drop in the number of smaller deals in the market. The Americas saw 21 awards over $40 million, which is a typical count, but the number of deals under $40 million plummeted. Our observation is that the traditional managed services deal flow in that region is indeed slower. There are fewer new deals. At the same time, we are hitting the renewal window of one of the slowest prior periods. About the same time back in 2008 when the Americas market slowed in a recession driven paralysis. The renewal market will come back, new scope success however requires some structural adjustments including addressing the middle market in a meaningful way and learning how to win and run outcomes based deals. EMEA accrued 4.2 billion in ACV awards in the first half of this year, down 69% compared to the second half of 2012 and the lowest half year total since the first half of 2009. The number of awards however remained flat half on half. Once again the region was hurt by a lack of large deals. EMEA had 19 awards 40 million in ACV, its weakest performance since the first half of 2006. The UK and dark markets were most responsible for the downturn. The UK where the recovery from the recession has been uneven saw $1.6 billion in ACV award in the first half of the year, down more than 40% from the last half of 2012. Germany’s outsourcing market seems to be feeling the effect of the recession more keenly these days and dark with 600 million in ACV during the first half of this year fell 58% sequentially. The other sub-regions in EMEA felt better however particularly the Nordics which showed one of the best half year performances in recent memory. As of the America’s and EMEA, Asia-Pacific struggled in the first half of 2013. ACV dropped 27% half on half while contract numbers declined by 10%. I’ll now ask Tom McCormack to look at the Asia-Pacific market in more detail and share some perspectives about regional trends. Tom?

[Tom McCormack:]

Thanks Sid. Let’s start with the look at the contract award trends in the region. Just to remind you with the exception of our specific public sector commentary later in the call, our analysis today focuses on private sector outsourcing contracts with an annual contract value of greater than 5 million. Asia-Pacific our awards of 990 million in ACV in the first half of 2013 down 27% compared to the robust titles in the second half of 2012. The number of awards declined slightly by around 10%. Performance in this region tends to swing on large deals because 2012 was overall the best ever in the region comparison this year is bound to look anemic. In fact ACV performance thus far in 2013 is remarkably similar to the levels seen in 2011. While global market performances were undermined by a lack of the smallest and largest deals, this is not quite the case in Asia-Pacific. The number of mega relationships signed in the region was flat half on half, thus shy of the prior five half year average while the number of smaller deals those with an annual value of less than 40 million declined by around 20%. The largest drop was in the mid-market, those deals with an ACV between 40 million and 99 million. This category saw values plummet by 83% in the first half and the lack of these middle market deals was responsible for the overall drop in Asia-Pacific market values. New scope activity of 860 million in the first half of 2013 was down 17% half on half but still dominated contract awards in the region. Restructuring activity was light with only a few awards made in this period. As a result both files reached their prior five half year average. Let’s now take a deeper dive into the regional performance to find out which services, markets and sectors have contributed to most of the first half drop. Starting with the industry sectors on slide seven, the region three powerhouse sectors, Telecom & Media, Financial Services and Manufacturing sectors, each saw their ACV fall short of their second half 2012 levels and all finished somewhere shy of their prior five half year average. In fact, by telecom and media and financial services sectors recorded their lowest ACV since the first half of 2010 and saw steep decline in the number of contracts awarded. The number of contracts signed in the manufacturing sector, more than double half on half signaling a welcome boost in outsourcing activity. However, these contracts were very small, average contract size in the sector declined in the same period from 170 million to just 75 million. Of the other sectors, travel and transport, energy and healthcare and pharma, all finished strongly, albeit of a very small base. Although ACV was up in these sectors, the number of these contracts signed remained flat. Moving on now to look at the individual markets within Asia Pacific, slide eight shows that all markets with the exception of Japan saw a fall in ACV in the first half of 2013. In fact the three largest performance in the region, all failed to reach their prior five half year averages. Quite simply, only a few large deals were awarded in the region and the middle market all but disappeared, a situation that can swing the numbers dramatically in a still emerging market. ACV in Australia and New Zealand, fell 50% in the first half of 2013. The 190 million awarded was the lowest since the end of 2006. In fact nine mid-tier deals those greater than 40 million ACV or mega relationships those greater than a 100 million ACV have been signed in the last two half. Economic uncertainty continues to prevail with the reduced investment pipeline in Australia's critical manufacturing sector especially in resources, little credit growth for the important financial services industry normally inactive outsourcing sector and appending Federal election whose date is yet to be scheduled. India saw ACV fall by 43% in the first half compared to the second half of 2012. Macroeconomic indicators have turned unfavorable in India. High inflation, slower economic growth, low business investments including foreign investments and national elections coming up next year has slowed decisions on large outsourcing deals in both the public and private sectors. Lack of clarity and shifting stances on key policy matters such as foreign direct investment in the retail and insurance sectors are affecting the general investment sentiments and making the business community cautious. Despite the fairly sharp decline in ACV, contract counts fell only slightly in the first half by 10% compared to the previous half. The most pronounced fall was in Australia and New Zealand which saw just 16 broader market contracts awarded, down 38% half on half. India saw contract flow by 17% for the same period. Japan Asean and China also contract numbers increased but only in Japan did this translate into increased ACV. In summary, fewer deals rewarded in the region and these were of a smaller value. Let’s continue with our analysis of the Asia Pacific market by examining ITO and BPO performance. Starting with ITO on slide nine, the region awarded ACV of 730 million in the first half of this year, down 14% half on half and short of the prior five half year average. The number of contracts, however remain steady at around 40. Remember that 2012 was the best ever year for IT awards in Asia Pacific and the level of activity as well as the ACV in the region is consistent with 2011 levels. We have also included a list of the leading service providers in the region for the first half of 2013 followed by ACV and contract counts. Each list is shown in an alphabetical order and no rankings are implied. You might be surprised to see the mix of India heritage and U.S. heritage firms. Over the last few years, ITO contract values have been affected by changes in all fronts and in all regions not the least of which is Cloud. We have talked before the impact of Cloud on the outsourcing market. While still an emerging factor Cloud is changing service provider and client behavior and posing new challenges and opportunities for everyone in the industry. As you can see on slide 10, at ISG, the percentage of our advised contracts globally with the Cloud component has grown significantly from 9% in 2010 to 23% since 2012. Occupy and advisory position of the forefront of the industry, if that’s not surprising that more of our deals have Cloud than is evidenced in statistics across the rest of the industry. That said, industry-wide analysis of our contract knowledge base has found a similar trajectory, the percentage of Cloud related ITO broader market contracts during those years rose from 1% in 2009 to 11% in 2012. In our most recent quarterly survey 85% of service providers indicated that their cloud-based opportunities are greater than those of a year ago. When looking at the practical impact of cloud, we see client slicing up application portfolios into smaller chunks and their tasking elements. Some clients are migrating workloads on to public cloud, infrastructure as a service platforms while others are realizing the potential of vertical as a service solution. Many of these projects start small and grow organically, but they do detract from net new growth with existing providers. Clearly cloud continues to be a disruptive factor especially among IT service providers. Moving on now to BPO, ACV being in the region sold by a half compared to the last half of 2012. As you can see on slide 11 ACV in 2013 has reset to more usual levels following 2012 outstanding performance. Contract counsels had fell in first half of this year down 22% compared to the regional high point reached in the second half of 2012. Despite this whole contract activity remains steady and finished close to the prior five half year average. Once again, the lack of middle market deals in the region affected the overall result. As you can see, we've also included a list of the leading BPO providers in the region, again in alphabetical order. The list includes some India heritage providers and the strong shelling of functions specific providers known for their niche expertise. Slide 12 shows a breakdown of BPO ACV by function. Industry specific BPO was the only bright point with 25% increase in ACV and finishing ahead of its prior five half year average, all other functions decreased half on half. The record ACV awarded in 2012 which was boosted considerably by the award of mega-relationship makes for a tough compare in 2013 and it also pushed up the price five half year average figures accordingly. BOP ACV in 2012 has returned to 2011 levels and the number of contracts awarded this year has remained fairly consistent with the previous year's pointing to underline health in the regions BPO market. Let’s move on and look at Asia-Pacific market through a different lanes that of annualized revenues, annualized revenues combined the active awards from current and previous years for any contract underway not just those signed in the current year that comprise the actual revenues available to service providers. These measures tend to smooth out the semi-annual ups and down of the market we focus on in our index calls. As you can see on slide 13, the number of active contracts in Asia-Pacific has risen steadily from 360 in 2008 to 609 through the first half of 2013. The buoyant nature of this market is demonstrated by a healthy five-year compound average growth rate or CAGR of 11%. Despite generally gloomy results in the first half of this year, annualized revenues climbed for the second consecutive year in 2013 resulting in a CAGR of 4%. The continuing growth in contract activity in the region demonstrates the ongoing potential of this market and is important in the global outsourcing economy. Let’s now turn to the slide 14 and some service provider data, for ITO awards CNVA heritage firms and the other category firms each hold the 36% share of the contract counts but the other category firms dominated ACV awarded holding a 40% share compared to the India heritage firms 28%. Just to remind you, the other category is made up of regional providers, niche or specialist players and the European firms. U.S. heritage firms 128% of the contracts awarded but took 32% of ITO contract value. The India heritage providers continued to dominate BPO ACV. This group accounted for almost half of the ACV awarded in first half of 2013 but won only 29% of contracts signed. In contrast today poor showing 2012 the U.S. heritage firm won most of the BPO contracts awarded in the region 38% of the total accounting for 32% of total ACV. The other category provided one-third of the regions BPO deals but accounted for just 20% of the ACV. I’d now like to look briefly at public sector outsourcing activity in Asia-Pacific and its impact on the regional market. As we’ve mentioned earlier, all of the metrics covered so far on this call were like the private sector contracts only. On this slide, we will discuss only public sector contracts with an ACV greater than 5 million. As you can see on the slide 15, Asia-Pacific public sector ACV totaled 480 million in the first half of 2013 and accounted for one-third of the overall regional market value. ACV was up 200% half on half, and the number of contracts signed in the first half also rose steeply up 142% sequentially once again accounting for one-third of the regions total. Australia and New Zealand accounted for most of the contract activity and almost all of the ACV. The 17th public sector contracts awarded due to an ACV of 360 million, up 350% half on half. It should be noted however that the second half of 2012 was the worst public sector ACV awards in Australian and New Zealand in a decade, and although the client is impressive, the 360 million awarded is fairly typical. Having registered as highest ACV ever in 2012, with some mega relationship awards India's share of public sector ACV also fell back to more typical levels in 2013. We had expected to see some continuation of public sector transformation in India, but as I mentioned earlier in the call, economic indicators have turned unfavorable and decision making has slowed considerably. We'll keep a close eye on this market over the coming months, to see whether this pours in decision making continues. We have listed the top public sector providers again in alphabetical order; you will notice that as usual with public sector rankings this list includes far more regional and country specific providers. That concludes our comments on the Asia-Pacific market, I would now like to turn the call over to Dinesh Goel to introduce today's special topic. Dinesh?

[Dinesh Goel:]

Thank you, Tom. Number of external pressures are adding to the competitive tensions within the service provider industry. In our special topic today, starting on slide 17, we're going to take a global view on the future provider landscape. Globally the industry has now had three straight half year periods with sluggish contract award activity. And service providers therefore need to be more creative as they look to hit growth targets. As an industry observer, we keep our ears open to market chatter and we're starting to hear a lot of talk about potential takeover activity. We noticed something similar a couple of years ago in the Chinese outsourcing industry, and can see now that half of the then top 10 industry leaders have disappeared. Some have gone through acquisitions by other providers or by private equity houses, while others have simply vanished following financial misconduct and other such events. These phases of consolidation have always been part of the market dynamic; for example when we look back at the historical competitor landscape we noticed that 30% to 40% of the set of its leading providers has changed over a 10 year period. Simply put 10 years from now we can expect six to eight of the current top 20 providers to no longer exist in their current form. They will be acquired or in some cases exit from the market. So how can one identify those providers most susceptible to acquisitions? From our unique perspective we took a look at the leading providers from the past 15 years that are no longer with us, and examined them from a number of aspects, including revenue growth and bookings growth. As you can see on slide 18, one thing we spotted was the evidence of a correlation between new scope bookings growth and the likelihood of a firm being taken off the market. Note that we don't mean overall bookings growth here, just a portion of growth due to winning new logos or significant expansions in current clients. For instance new scope bookings seem to decline sharply by around 25% during the two years leading up to the announcement of the acquisition. As food for thought we observed that almost half of the current top 15 providers in the market show a decline in the new scope bookings over the prior two year period. So this analysis together with our more general experience in the industry leads us to the conclusion that the industry is ripe for M&A activity. Of course there are always contrary reasons why mergers between large companies do not make sense. After a certain point it seems that increasing scale often brings administrative and integration burdens rather business benefits. Yet as we all know the fact that large corporate takeovers can often be destructive of shareholder value does not prevent them from (inaudible) and in this case we can see a number of benefits to market consolidation over and above the need for growth. Mergers might help provide us for instance respond to proposed U.S. visa reform challenges as well as reform challenges in Australia under proposition 457, by addressing some of the requirements to have a certain portion of employees onshore. It might be away of kick starting BPO growth particularly for specific capability players, there also might a sensible way of managing risk through reducing the dependency on certain clients particularly in the financial services and healthcare sector. For example TCS recently announced the acquisition of a French enterprise solutions provider Alti, with the intent of expanding its reach in France, the third largest IT services market in Europe after the UK and Germany. Earlier this year, Tech Mahindra had also announced the acquisition of a majority stake in Complex IT an SAP consulting provider in Brazil to focus on developing solutions for the rapidly expanding ERP market within Brazil. We’ve been doing some analysis of overlapping client basis to investigate this possibility. We'll be continuing to watch this market and expect to be returning to this topic in future calls. Now I'll turn the call back over to Sid, to provide some concluding remarks, Sid.

[Sid Pai:]

Thanks Dinesh. Let's now close the call with a summary of today's headlines on slide 19. To wrap up, despite the gloomy first half results we believe the global markets show some positive signs and we have a degree of optimism about the second half of 2013. Service providers report strength in their pipelines, we believe the global market turn is (inaudible), and we expect to report more positive numbers in our next index call. Lag in new scope and a lack of large deals plagued all regions during this half. While IT awards and ACV struggled, BPO activity levels remained solid, so the overall ACV weakness in the first half does not signal a decline over the longer term. IT awards continue to dominate market activity in Asia Pacific over the next few years, but the impact of cloud and other delivery mechanisms will nibble away at contract sizes reducing the overall ACV awarded. In general we're buoyed by reports of provider optimism particularly in EMEA. Asia Pacific weakness is of concern, but this being a smaller and more volatile market, calling a downward trend here would be ill advised especially hot on the heels of the stellar 2012 results we had. We will be watching closely in the months ahead to see how these market indicators develop. With that if you would like to engage in our interactive dialogue about the ISG outsourcing index following our Q&A session here today, you are welcome to join the discussion at our blog, blog.isg-one.com. At this point I'll turn the call over to our host Rishi, to introduce the Q&A session. Rishi. Rishi Jhunjhunwala - Goldman Sachs Yes sir. Thank you for a great presentation, maybe I'll kick off the Q&A with a couple of questions and then open the line for the rest of the participants. So firstly interesting to note that the broader markets seem to be down due to weakness in financial services and manufacturing. Can you provide some color on what's going on in these sectors, is it just an aberration, or do we expect the weakness to continue in the coming quarters as well?

[Tom McCormack:]

Yes, you're right, those are the two sectors that contributed most over the years, as we well know they are the largest sectors. But we think that this isn't necessarily a long term weakness, I think there's a couple of things that we can expect. one, don't forget it's a back of the renewals from 2008 so we've got that five year window right now where the renewals are on activities that was historically not that large in 2008, but that will pick up for sure. The second thing is that a lot of the financial services IT spend that's incremental to what they've already been spending is going to be due to regulatory compliance requirements, you know all the new regulations coming out about various things in the financial services industry is going to cost significantly more spending in that industry in order for them to be able to comply. Also overall, these are quite highly penetrated sectors, from a sourcing perspective. So in some sense it's actually good news that sectors such as travel and energy seem to be really seeing a significant spike now in sourcing activity and those sectors are now providing strength to the market. Rishi Jhunjhunwala - Goldman Sachs Understand, and secondly on the outsourcing vendors. If you can give us some color on what is differentiating one vendor from the other in a new scope deal versus restructuring deals, is it pricing, execution, scale, relationships or something else, and who are doing well among the Indian guys in both these segments respectively.

[Tom McCormack:]

With respect to renewal performance I think some of the Indian service providers noticed early that this was a market that was maturing and therefore there were existing relationships that they could mine in order to create some market share shifts. So I think those that adopted that as a strategy early on are now reaping the benefits of some of that from a strategic perspective. We obviously won't take specific names of service providers of who's doing better than the others, but I think they've been pretty public about which parts of the market they've been focusing on and how they're looking for growth. The second part of your question I think was in general with respect to newer scope. Newer scope is still open and up for grabs, but it's in different sectors and in different sized companies. So the middle market which we touched on our call as for instance is where a lot of the opportunity is and where providers necessarily haven’t penetrated to the levels that they need to just yet. So I think over a period of time we will see additional focus on that middle market and first time adopters of outsourcing are off-shoring, and I think some of the growth is going to come from that part of the market.

[Operator:]

Thank you and we will now begin with the question and answer session. All lines will be open. Those with questions, you can begin to ask your question. Rishi Jhunjhunwala - Goldman Sachs Maybe I will chip in with one more in the meantime. You know you’ve talked about cloud adoption. The increase in adoption of cloud is quiet clear from the data you presented. Can you provide some deeper insights on how much is it impacting the contract values and any specific types of providers who are more successful than the others with cloud in the mix?

[Sid Pai:]

Sure, I have a small perspective on this, but I'd rather have Tom address this because he is sees it on an ongoing basis with some of the IT contracts. So Tom, do you have a view on that?

[Tom McCormick:]

Yes, couple of points on that; Sid, thanks for passing that over. Certainly maybe I will first start with the last part of the question that is the service provider that are implied. I think that by the U.S. and Indian heritage providers are both well placed in terms of their investments and also some of the alliances that might have been striking and ready for the cloud. And the majority of them are investing. The majority of them are investing, but I will tell you they’re ahead of the curve. So they’re well positioned. In terms of the contract value, while I did mention during this call some of the percentages or contracts which have cloud involved, I think it was about 11% in the broader industry. They are still not having a huge impact in terms of absolute dollar value with respect to (inaudible). I think if some, it’s what’s happening is that we are having seeing niche areas within organizations being moved into cloud. And there’s also had been a little bit of constraints in the client community because we had application portfolios, existing application portfolios which are not as I would say, quite out ready, that there’s certainly some early activity. Some of the bigger areas that we are as an organization involved with are areas like ERP, as a service apart from the SAP, Oracle areas which has proven quite a positive outcomes for a number of our clients.

[Operator:]

Thank you. (Operator Instructions). Our first question comes from Adarsh Latika (ph), your line is now open, please go ahead.

[Unidentified Analyst:]

I understand that the value of cloud contracts have increased dramatically from 2009 to 2012. In this scenario how well are the IT service provider contribute from the talent perspective. Do they have with them good talent with them or are they right now spending on developing the talent for the cloud contracts? Thank you.

[Sid Pai:]

So I will try address a little bit of that, Tom and then I will guess I will turn that over to you. From a talent perspective, I think the thing really Adarsh is that, what we are finding is that this is a market that’s being defined as we go along. And service providers and others, not just service providers, but new entrants into the market, such as Amazon, such as Google then others will not historically have been thought of as being IT service providers, are also entering the market. So there is a bunch of different things that are happening and talent development and talent acquisition in order to be able to address this market space is just one of them. I think what most people are trying to do at this point is to hit a high water mark with respect to something new, different and completely out of the box from a solution perspective in order to be able to lead the market. Now the talent acquisition will probably come once, in those high watermarks have actually have been set. So I would see that as a sequential response and not the first response.

[Tom McCormick:]

One thing to add to that Sid is, that some of the service providers who are referring to partner with organizations like Amazon, Rackspace. What they are really aiming for is one of the things about the broad clamp providers like the Google’s is they be no distinction between the consumer or the high level business user with regard to service level quality impact on service. So the providers in the community which are pairing up with these sort of clamp providers to provide a more holistic service are very much focusing their creativity and the talent in their organization in terms of providing high levels of service integration into the organization and also are providing appropriate levels of quality and service in specific areas which is really has a high level of business impact to those clients.

[Operator:]

We have another question from Dheeraj Kapoor. Your line is now open. Please go ahead.

[Dheeraj Kapoor:]

Hi. This is Dheeraj Kapoor. The question is cloud is yes definitely one and issue to organization such adapting to and service providing organizations are probably trying to cope up with that. But, what besides cloud is booming up in the Asia-Pacific market, is digital enterprise, social media, analytics, anything is on the radar for ISG?

[Sid Pai:]

So, we do see, Dheeraj, we do see big data and analytics type focus deals because lots of the financial services sector clients as well as some of the retail CPG groups are very interest in what big data and analytics can do for them. But, with respect to it being pay massive market just yet I don’t think so I think it’s still in early planning stages. There are a lot of strategy oriented work that we’ve been asked to do around those areas, but not necessarily as much transaction oriented work. I’m sure Tom will have an added perspective especially in Australia, New Zealand, which I think is probably most furthest along from this standpoint for these areas in our region. Tom?

[Tom McCormack:]

Sid, really in line with cloud is very much, I’ll use the term end user computing I want to use the term desktop or laptop and quite often in the IT journals and press it’s often referred to as bring your own device. I guess that has an overarching aspect of mobility. But certainly the CIOs that we sit down with and talk with are under enormous pressure in terms of providing a level of connect to their organization across the myriad of devices from the smart, the Android and the iPhones right up to the tablet based desktops, laptops et cetera. And not only allowing that connectedness to work in all corners of the organization’s operations but also what can be sometimes quite a number of legacy style applications and intending to integrate them into those end user devices. And certainly I’m seeing a number of the service providers who are speaking with us as well who are focusing very, very heavily on this sort of end user experience and being quite agnostic about whether that say, the end user is looking at in the client organization or in fact just seeking in cubical in the client’s office at a normal standard desktop, that’s probably one of the areas where there is lot of movement. And we, as an organization, are doing quite a bit of work in that area with that client base helping them and with the service providers crafting out some appropriate solutions. That’s a good question to ask, a good question to ask.

[Operator:]

We have another question from Boopathy Rajendran. Your line is now open. Please go ahead.

[Boopathy Rajendran:]

My question was that promptly the customers that we are working ANG and Asean region, the customers have been asking all the (inaudible) onsite, not much of off-shoring it sea and which is eventually increasing the cost for the customer. I mean is that the trend which you’re seeing there or are they getting open for off-shoring which will reduce the cost and probably there will be more of prior spending? I mean is it something that we've seen the last 20 of that customers billing 15 providers to be at onsite, and officially energy? Is there something changing or will it continue or will you see that as a trend?

[Sid Pai:]

So Boopathy what we’re seeing there actually interestingly enough the reason that there is a push back from clients in the Asean region is that the level of label arbitrage from off-shoring is to be clean not as large as it is say from Australia and New Zealand or for more developed countries like say potentially Hong Kong overall, right. So, we get asked question often by our clients in places like Thailand, Indonesia, as to whether or not it’s really worth while having a remote set of services provided when in fact those services can be provided at more or less the same price. I recognize this is more difficult to flag out, people have talent and have the talent there but that’s the question that is asked and it is also by and large a market, the reason is not yet completely right for doing work remotely. We are seeing it in some instances, we are seeing in some instances where clients have already had one experience without outsourcing and now on their second generation we really see this considering off-shoring because they understand how it works, they understand the benefits and so forth, but I think it’s going to be a learning curve and a majority curve certainly for those seven countries in the Asean region, or now it’s timing but in the seven (inaudible) because of in Asean.

[Boopathy Rajendran:]

And how about the trends of opening their own captive in countries like India I mean is that something they are looking forward for like global or may be simply in the U.S.?

[Unidentified Company Representative:]

So do you mean global organizations, or Asean organizations opening (inaudible)

[Unidentified Analyst:]

No, similar to global organizations, opening two actives in India are Asean or AMD customers who can get captives here

[Tom McCormack:]

Not really I mean you would find that obviously there is a significant number of captives that have been opened, I think count NASSCOM said there is somewhere in the region of 700 or 800 if I am not mistaken, of considerable size, but no we don’t really see Asean-based companies wanting to open captives in India. In some instances, those with strong China affiliations, consider China as a destination, especially if they have large trade with China, Asean company that has significant trade with China might think of China as a destination but there is not any great investment into captive centers or actually the politically correct term is global developments centers or global delivery centers, GDCs in India. So not from Asean but globally certainly, yes.

[Sid Pai:]

See that if I could just add for Australia or New Zealand, I can’t honestly say I am seeing a trend either way. I sat with the client this week who has zero resources onshore and all of them considering sitting in operational delivery centers primarily in India. That’s the way the client prefers it, they are financially focused and they are happy with the outcome they receive. And alternative, one of the factors particularly in applications developments space is some of the impact of agile program development, the prototyping and the way that the agile process works versus the more traditional waterfall methods certainly encourages a highly interactive environment which is at times at odds with some of the traditional on-shore off-shore ratios that you might see for application development, so certainly I have seen some instances with a higher level of onshore component with respect to both types of environments, but of course that runs at odds with the demands of the CFO of that organization and as Dinesh mentioned earlier, some of the political issues specifically to Australia and I know also to the U.S. with regards to our on-shore workers from foreign headquartered organizations.

[Operator:]

(Operator Instructions). At this time, we do not have any of further questions, (inaudible) back to you. Rishi Jhunjhunwala - Goldman Sachs So maybe I will just chip-in with one question and which is a follow up on the previous one, so what we have been seen as far as the trends in the large captive operations on one hand, they are getting sold because it’s becoming difficult to maintain them and on the other hand, especially the India-based captives are getting the headroom from the currency depreciation. So what do you think is you are seeing in terms of trend and what is likely to continue as well and why?

[Sid Pai:]

There is a significant difference from a few years ago, few years ago service providers were looking to build out certain solution capabilities or in fact by into new industry segments and so forth, and they are willing to pay into quite large asset premier so to speak for a captive so it wasn’t just a question of whatever assets, depreciated assets or numbers of people and just taking those over and is in a traditional outsourcing deal. It was a lot more or around whether or not they could themselves get a platform to enter in an industry or to provide a particular service or to (inaudible) rank a client and so on and so forth. so few years ago, we saw quite a few deals which are with eye-popping numbers where service providers were paying significant asset premier to captives in order for them to be able to them bring the captive in-house into the service provider. Today, it’s actually quite different, you pointed out a couple of different things but the fact that the rupee has depreciated as much as it has, has provided quite fillip up because now it’s all this is export base and it’s therefore certainly for in a dollar denominated buyers a lot cheaper, so there is less of a reason to let go plus there is also not that much assets premier that the service providers are now willing to pay because they rounded their capabilities and rounded out what their solution sets out in the marketplace. So while we see still captive acquisitions happening as part of overall outsourcing dues, we don’t really see standalone captive monetizations as we used to be called in the past. So there is some back and forth in every outsourcing deal and there will be some takeover of course inclusive of captives, but it is not a standalone front page news kind of thing anymore.

[Tom McCormack:]

Can I just add to that Sid, so there is another trend Rishi that we’re seeing there in that space particularly with large captives, we’ve been here for long time, there is this trend of them looking at their value change and outsourcing some of the bottom of the pyramid or even middle of the pyramid type of activity on a low people sourcing perspective to the providers, so which is sometimes termed as I to I to India to India transactions, so that trend is also we’re seeing more activity, great level of activity there. So I mean that combination sort of forces them to relook at the overall value in terms of leveraging the market as well as the captive to provide to the parent businesses.

[Unidentified Analyst:]

Understand and are the developments on immigration and other risks also contribute to that in terms of companies preferring to do more than their captive rather than depending on the outsources?

[Tom McCormack:]

It’s a good question, I think some of that depends on whether or not they already have the luxury of having a larger enterprise over here. The resellers forms such that they’ve been mooted suddenly out of the U.S. are not get 100% clear, I mean it’s not clear what form they'll finally be passed in, so we’ll see how things go. But assuming they get passed in the way that they’re currently mooted then I think we’ll end up with a situation where we see two or three different things happening. one you’re right if I am a large client and I already have a large captive in India and I have less of the recent restriction problems than my service provider has, then why not have my captive do more of the work so that certainly will happen. The second things that we will see is that I think based on a special topic which Dinesh covered, is that because of some of the specific numbers that are part of that legislation you might find Indian service providers actually willing to make significant acquisitions in the U.S. of midrange or as small as service providers that already have a large employee base in the U.S. So, I think it will work both ways, if they are large captives and already have large employee populations in both the U.S. and in India then that would mean a reduction in demand but for the others I think once the Indian service providers have sufficient employee strength in U.S. which believe me they will, then this entire be setting will go away, it will be a tough process but I think there will be clarifying about 12 to 18 months from now certainly.

[Operator:]

Yes, we have one question from, Greg McCrary (ph) your line is now open. Please go ahead.

[Unidentified Analyst:]

With the return to more historical trend levels in the first half of this year, have you been able to identify what some of the factors that were driving the peak here in 2012?

[Tom McCormack:]

So some of what was driving the peak in 2012, Greg, was renewal activities. So at one point in 2012, we reported that fully two thirds of the market was based on renewal activity. So if you just count back in the numbers of years from 2012, 2007 the recession really hadn’t quite hit, people were still doing deals. There was still a large number of contracts that were coming out into the market. In fact 2006 and 2007 were really banner years from an outsourcing perspective. so about five years is the typical life of a sourcing contract, of course it varies from three to seven but if you take five as an overall average, it wasn’t surprising that we saw 2012 being a banner year because it was being fueled so much by renewal activity and interestingly enough it isn’t so surprising that we’re seeing this drop-off right now in 2013 because it’s five years after 2008 when most people start just slowdown, so that will be the primary reason and also in 2012, secondarily we began to see a bit of uptick which will continue and we’ve talked about again in the middle market, so firms that had never considered off-shoring some of them household names when firms they had never considered off shoring were beginning to consider it. But these are now more Fortune 2000 level companies rather than Fortune 500 level companies.

[Operator:]

At this time there are no further questions, on the queue, back to you sir.

[Tom McCormack:]

So Rishi I will turn it to you to close out the call. Rishi Jhunjhunwala - Goldman Sachs Tom, Sid, Dinesh thank you very much for your time and your valuable insights. As mentioned we'll have a replay of this call also available on the ISG website as well as with us. So please feel free to reach out to any of us for that. Thank you very much for the call.

[Operator:]

This concludes today's conference call. Thank you for participating you may now disconnect.