French IT services group Capgemini finds itself the subject of yet more takeover rumours as it this week reported full-year profits well up.

According some reports, the firm has held early-stage talks with Reliance Communications, of India. If true – and neither party is commenting – this could result in the first acquisition of a significant Western IT house by one of India's fast-growing competitors.

It's not the first time that Capgemini has been the subject of such speculation. It was rumoured last month that the firm had held talks with Wipro, but a merger was eventually deemed to be “not viable”. Earlier this month we reported that Infosys or Wipro were reportedly considering a partial acquisition, which was flatly denied by Capegmini CEO Paul Hermelin, who claimed these were attempts to destabilise the company.

According to most analysts, no Indian company yet figures in the global top ten IT service providers in terms of market share, and so the first company to create a big enough presence would attract a great deal of attention. Gartner concludes that it will take India's largest IT firms “a number of years to challenge the top service providers… unless they make a major acquisition".

Capgemini itself acquired Hyderabad-based Kanbay International in late 2006 to increase its presence in India. It hopes to have 40,000 people in India by 2010. Hermelin is on record as saying that he did not see the situation occurring the other way around. "It doesn't make any sense," he said. "The big Indian firms have a formula that works. They are not going to ruin it by bringing in 60,000 Europeans."

The latest rumours surfaced as Capgemini reported full-year profits for 2007 up from €293 million to €440 million (£327 million), but warned that the sub-prime crisis in the US could yet damage its prospects. “It is not inconceivable that the difficulties of the banking sector will end up spreading to the whole economy and reach our own disciplines,” warned Hermelin although he remained upbeat about organic growth for 2008.

The strongest growth in 2007 came from technology services, with revenue up 11 percent. Outsourcing services grew 7.8 percent and consulting services by 4.5 percent. The UK and Ireland grew its consulting and technology services activities by more than 10 percent, though overall revenue for the region was only up 4.4 percent thanks to a restructuring of the flagship HM Revenue and Customs (HMRC) contract.

“During the year, HMRC has made a 'lower contribution' – i.e. margins are being squeezed,” noted Kate Hanaghan of analyst firm Ovum. “The Aspire contract is hugely important for Capgemini, and for the UK business in particular, because more than 50 percent of its revenues come via this deal.

”Yes, Capgemini has been able to pick up other bits of work with the client to counter the revenue drop (which we estimate to be around £45m per annum), but this clearly represents a significant challenge for the firm.” There are other areas of concern as well. “Growth throughout the year has declined - and that's largely due to the performance of the outsourcing business,” noted Hanaghan. “For the year, outsourcing growth was 7.8 percent and, while the operating margin has improved, this is still slim.

“But what has really caught our eye is what Capgemini is predicting for future growth: just 2-5 percent in 2008. Given concerns around the macro-economic climate, this is perhaps not altogether surprising. Suppliers, and not just Capgemini, need to be thinking now about what they need to be doing to prepare for a worst case scenario.”

It's certainly true that many CIOs will be jittery, as Hanaghan believes, as they try to prepare for that most difficult challenge – uncertainty. “Against this backdrop, firms need to consider how to appropriately incentivise their salesforces,” she advised. “The key message to customers must be focused on cost-savings. However, it is equally important that suppliers keep pushing their message around global sourcing, industrialised services and innovation in order to help customers understand the longer-terms benefits of outsourcing.”