Outsourcing is Back—and that’s Good for Business
In a sign that technology spending by American companies is slowly returning—and that the economic recovery is on track—information-technology companies have reported surprisingly upbeat earnings this quarter.
So far this earnings season, IT outsourcing firms Infosys, Wipro and Tata Consultancy Services have all beat Wall Street’s expectations on earnings.
And on Tuesday, Cognizant, one of the biggest players in the sector, bested estimates by 2 cents, thanks to a 7 percent jump in sales over the previous quarter to $2.2 billion. “Cognizant continues to execute well in an improved spending environment, especially in the U.S.,” said Keith Bachman, an analyst at BMO Capital.
Investing pros and analysts typically look to earnings from IT services firms for clues as to how corporations are putting their cash to use—whether to improve efficiency, cut costs, build a new product line or some other strategy.
During the downturn, corporations largely used IT firms more to cut costs by using their cheaper offshore services.
(Read more: These S&P value stocks might get you through August)
However as the global macroenvironment improves, Cognizant and other IT services firms have seen an uptick in demand for consulting services as well.
That change can be witnessed now, Gordon Coburn, Cognizant’s president told CNBC. “There is a fundamental change in what our customers are looking for,” he said. “Clients are not only looking for help on how to run operations better, they are also looking to run their operations differently.”
This is welcome news for IT firms, which haven’t had an easy road in recent years, thanks to the sluggish economy in the U.S., a slower-than-expected recovery in Europe and a volatile currency environment—most notably, the rupee and yen depreciating against the U.S. dollar.
Will the sector continue its comeback? Analysts said that will depend largely on these companies’ ability to innovate and develop new consulting services that can help clients maximize their growth potential.
—By CNBC’s Seema Mody. Follow her on Twitter: @SeemaCnbc
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