Sramana Mitra, whom I regard highly, comes out with a provocative article – may be the title is more provocative . While I agree with her on the part of the offshore headquartered industry needing to look more at products and solutions, I disagree with most part of the article and her conclusions. Getting into products business is a moot point – its like saying Singapore airlines should get into aircraft/aircraft parts manufacturing,to be counted as future safe in business! I find most part of her article somewhat biased. In particular –
“India's $30 billion IT/ITES services industry, meanwhile, is slowly and surely losing its competitive advantage. They are complacent. They will not take risks. They have "outsourced" thinking to their customers”
. None of this is true- my submission.
Ask the CIO’s working with the offshore majors to get a true picture. The fact to note is that Indian IT’s rise as a disruptive force in global IT services delivery is now well accepted. Three – four years from now, the Indian IT services and business process outsourcing (BPO) is very likely to touch US$100bn mark in revenues. In the last ten years, every possible forecast has been bet by the industry and the naysayers have had to bite the dust. The coming years are proving to be as promising and transformational as in the past. Just look at the track record -In the last ten years, the Indian headquartered IT will have grown by nearly twelve times, at a 28% Cagr, compared to a 5.3% Cagr for global IT services spending. Within global IT expenditure, the outsourced component will have grown by around 8%, and in-house spending at only 2-3% - both substantially lagging Indian IT’s phenomenal rise.
From its base level, despite expanding scale, the revenue growth has been 30% plus YonY and it appears that this growth more –or-less may be maintainable for the next few years. Very shortly, we may see 1/3rd of global outsourcing of IT services outside of government spending may be serviced by the offshore majors . Estimates suggest that volume share in english speaking countries may reach around 45 to 50% in the same period. In the services segment from smaller service lines, where they are traditionally strong, Indian IT services are moving to larger spaces like IMS & BPO. Its futile to think that all these growth would happen automatically. Answer to Sramana’s point – in this transition opportunities on SaaS and emerging technologies get adequately factored in. Ask the major SaaS players and product players – they will vouch for the critical role that offshore majors are playing. All strategic partner relationships of product players have the offshore majors playing a substantial role therein. No the Indian headquartered players are not missing on any great opportunity – look at the type of deals being closed, the nature of acquisitions being announced; or better ask the hordes of global IT executives wanting to work for the offshore majors- they will tell why the game is changing – fastly, decisively and increasingly looking like forever.
Update : AMR's Philip J. Fersht provides the right perspective on this topic. I can't agree more.
Labels: CIO, Emerging Trends, IT Services, Offshore Players
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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
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