Indian IT services firms need to reshape their businesses if they are to continue to grow at the rates experienced over the last decade, as traditional markets and service offerings reach maturity.
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Research over the last decade from ISG has revealed an increase in global market share of 13% for Indian IT services firms, compared with a decline of 7% for their multinational equivalents.
But growth will slow for the Indian companies unless they establish services that offer non-linear growth, spread geographically beyond their main markets in the US and UK, win government contacts and develop core software and BPO aimed at specific vertical sectors, according to Sid Pai, president at ISG Asia Pacific.
Over the last decade, Indian suppliers have differentiated through offering lower costs. This was made possible by the lower cost of labour in India compared with the UK and US. Businesses have grown in a linear manner through a time and materials model, with extra bodies being added at a fixed rate.
This has helped the India suppliers grow rapidly. According to ISG, between 2005 and 2008, Western suppliers’ revenues grew at a 7% combined annual growth rate compared with a rate of 32% for India-heritage providers.
But the recession, which began in 2008, has been a shot across the bows.
In the years since, western firms' annual revenue growth has been 0.4% and the Indian firms experienced half the growth rate at 16%. ISG said this is the result of a maturing market.
But Pai said things are changing and the India-based firms are reinventing themselves.
”They are trying to cut off the link between bodies and revenues,” he said.
“India-heritage providers have been increasing their market share in an overall static market,” said Pai. “Their growth is now slowing since they have begun to reach high levels of market penetration, so the onus on them is to find ways to continue progressing by expanding into solutions and industry-focused software products.”
He said the Indian companies need to start developing core software for particular industries rather than platforms that sit in the periphery of businesses.
For example, they could build core billing platforms for telcos or core banking systems for finance firms.
He said there are already examples of this with Infosys and TCS having their own banking platforms, but he said there is not enough. These developments would help achieve non-linear growth with revenues linked to usage with revenues rising at higher rates than costs.
In its latest results, Cognizant talked about its increasing success in service lines offering non-linear growth.
CEO Francisco D'Souza said: "We continue to make solid progress developing emerging offerings in new markets, such as social, mobile, analytics and cloud technologies and new non-linear solutions and services.”
D'Souza highlighted Cognizant's Business Cloud portfolio as an example of a service offering non-linear growth.
Mark Lewis, outsourcing lawyer at Berwin Leighton Paisner, said that big, India-based service providers are attempting to move towards non-linear growth models.
“They will all have to do this – they cannot continue with linear models because it’s a fight to the bottom in IT outsourcing and BPO,” said Lewis.
Pressure on traditional models
He said falling prices, automation and cloud computing are examples of the pressure on traditional linear models such as time and materials.
Another growth area, according to Pai, is in BPO. He said Indian heritage companies need to create industry-specific BPO services, rather than one size fits all that is used horizontally.
Geographical expansion is also required with a necessity for the India suppliers to move beyond their main markets in the UK and US.
“The Indian suppliers have been shy to employ people that know the European market,” said Pai.
Companies such as HCL and Infosys, with the acquisitions of UK SAP specialist Axon for £440m and Switzerland-based SAP consultancy Lodestone for £218m, had increased their continental footprints.
Then there is the public sector.
The Indian suppliers have focused on the private sector and today, most large Western corporates have some work completed offshore in India.
But the public sector in Europe is an opportunity to grow. TCS has been included in the government’s latest G-Cloud framework and it recently won a contract with the Home Office to run the Disclosure and Barring Service (DBS), which was created when the Criminal Records Bureau and the Independent Safeguarding Authority came together. As part of this deal it is setting up a delivery centre in Liverpool.
But Pai said the question is are they doing enough?
“None of this is new to them, but are they willing to step up the pace,” he said.
He added that despite Indian suppliers being well aware they need to change, they might be hesitant because the current model is still working.
“It is difficult to cut down on the existing business model that has been successful for so long. They think ‘why fix something that is not broken?'”
Peter Schumacher, CEO at management consultancy Value Leadership Group, says Indian suppliers are more mature in their evolution than often given credit for.
“The traditional players in Europe and the US have been more static than the offshore suppliers,” Schumacher said.
Like Pai, he highlighted the work of TCS and Infosys in core banking as a good example.
He said the India base offshore suppliers invest more in R&D than European counterparts citing TCS, which has had a research centre, known as Tata Research Development and Design Centre (TRDDC), since 1981.
In recent research – carried out across Europe by the Value Leadership Group and Deutsche Bank – of 125 companies with IT budgets ranging from €20m-€2.1bn, the IT buyers were asked whether they thought it would be easier for Indian offshore firms to move up the value chain or would it be easier for European companies to move down the cost chain?
Unanimously they believed that it would be easier for the Indians to add value.
The research, which was carried out through in depth interviews revealed that traditional IT services firms, European in particular, face huge challenges to evolve to market needs. (see research extracts below)
Findings of Value Leadership Group research, traditional versus offshore research
Global manufacturing business in continental Europe:
Q: Are you working with traditional suppliers?
A: We haven’t considered traditional players in years.
Large transport group, continental Europe:
Q: Costs are rising in India - do you think the traditional firms will eventually match the Indian firms on cost?
A: No. We don't think traditional providers will ever be able to match the Indian firms on cost – rather we believe that the cost pressure on the traditional firms will increase as the offshore firms gain more market share in our country.
Q: How are you allocating projects between traditional firms and offshore firms?
A: Our procurement approach is not to give work to a European firm, if an offshore alternative exists.
A large global financial services business with major operations in Europe:
Q: What strategic advantages do the traditional firms have in your view?
A: Domain knowledge is the last thing the traditional firms have – once they lose this, they are gone.
Q: Who do you see winning in the long run?
A: The Indians will win.
Member of the board of a major captive banking, financial services and insurance company in continental Europe:
Q: In your view, how would you assess the capability of offshore-based firms to adopt European business practices, as opposed to the capability of European IT services firms to become more competitive in terms of pricing and efficient global delivery?
A: I think it will be easier for the Indian companies to adapt to the European way, than for the European companies to make efficient off-shoring. I have trust more in Indian companies.
Q: So, you are saying that the legacy companies have a material disadvantage as in fact they have legacy structures?
A large global manufacturing business with major operations in continental Europe:
Q: Would it be fair to say that the offshore companies have a global capability that is at least equivalent to, or would you say that is possibly even better than, that offered by the conventional companies
A: At this moment, I would say it is better.
A large global bank with major operations in continental Europe:
Q: How would you assess the global delivery capabilities of traditional firms?
A: The traditional firms just pretend to provide offshore services.