The Hindu Business Line : `Tier-III cos face marginalisation'

Research and consultancy services provider Forrester Research Inc believes that while the Tier-I top three companies get into a bigger league of IT services, many of the Tier-III companies face the threat of getting marginalised.

The Vice-President, Asia Pacific Research, Mr John McCarthy, said the conventional thinking of rising tide will lift all boats does not hold true in today's increasingly competitive environment and mere cost arbitrage will not hold true any longer. The profitability of Tier-III companies will diminish progressively with barely couple of them managing to become niche players and moving on to probably $1 billion companies.

Apart from TCS, Wipro and Infosys, who have ramped up significantly, and the next in Tier-II category — Satyam Computer, HCL and Cognizant (all of them around the $1-billion mark), there is only Patni in the $600-million range, and the rest could be classified as in the Tier-III category with revenues of around $200 million.

Of the Nasscom top 20, close to 15 fall under the Tier-III category. It is this segment, which is vulnerable to global competition. Cross border mergers and acquisitions are also poised for increase. As European technology services providers such as Cap Gemini, Atos Origin, and Logica, among others, seek to expand presence in India they could potentially acquire Indian companies, Mr McCarthy explained.

On a visit to India, Mr McCarthy, whose work on outsourcing has been rated as a "landmark study" by Time magazine, said that many IT companies in India have still not realised the importance of investments in marketing, which can make or break a company. The pace at which business could change, could pose a threat to these companies.

"The top three companies have registered a growth of over 30 per cent and the growth rate of companies in 11-20 of Nasscom top 20 ranges at about 20-22 per cent. It is a cold reality staring at them. Unless they bring in changes in their approach and business strategy, they will find the going tough and may even get reduced to body shoppers. If the profitability dips, they will get into negative cash flows in the next 18 to 24 months," he warned.

Referring to the captive BPO companies, Mr McCarthy said slowly these are set to witness buyouts in the form of `termite strategy', that is slow and steady stake increase.

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