In my 2007 predictions for offshoring, I wrote,"there is a wave of capital chasing new ideas centering in offshoring and several small and medium enterprises, are actively pursued by various class of investors. We shall see the hithertho conservative players investing significantly in various things and mature into significant players in grabbing offshore deals".
It is interesting to see Deloitte India launch a private equity service focused just on small India based IT companies. The expectation is that the consolidation will occur among smaller IT services companies & these companies will need private equity services to help navigate the upcoming waves of buyout activity.
Let’s look at the landscape: There are more than 3,000 smaller companies in the country focused on BPO, call centers and software development. These smaller firms are ripe for acquisition as their margins suffer from the combined effects of rising wages, difficulty attracting talent and now, rupee appreciation versus the dollar. Consequently the expectation is that a lot of smaller 'mom and pop' IT shops in India will be forced to sell to survive. The small shops lack the scale and customer base to weather 18% annual wage inflation on the back of rupee appreciation. 'Captive' IT companies, serving dedicated western clients will have to consolidate to drive scale and increase attractiveness to talented prospective employees. The attraction for larger players to buy them out is on account of their highly trained staff and acquiring a marquee western client (or a few clients) in the process. Captive units of large global business providing offshoring business may also find the goings unattractive and may opt towards taking services from service providers. Third-party service providers generally outperform captive offshore facilities – a point that I have repeatedly highlighted.
Some of the smaller players are at cross roads grappling with a number of issues:
Talent crunch hurts the more with limited brand pull and career options . The volume , process expertise and quality maturity all are related mostly to scale and margins.
Where they scale up – it invariably leads to a discpersed client base – further hurting specialization - vertical or horizontal. Operational issues overweigh and building the organization for the future with right vision and strategic investments that may be needed in time may not happen.
In all with the scale-ups happening faster and faster with Tier-1 players, there’s going to be a lot of churn with the players of the other tiers – while I do not think that all of them would get wound up, a lot of refocus and realignment is clearly on the cards.
Labels: Emerging Trends, Offshore Players