The Hindu Business Line : 2006: Outsourcing turns mainstream

Year 2006 was a good haul for the country's IT services industry. Outsourcing became mainstream. India established itself as a dominant offshore destination.

The big boys of Indian IT turned bigger, expanding global footprint even as markets like Europe opened up further. Large multinationals took to offshoring seriously, enhancing their offshore presence in countries like India.

Riding the strong outsourcing wave, Indian IT services firms saw an accelerated growth during 2006 and are optimistic about the outlook even as the possibility of an economic slowdown loomed large in the US — the largest market for Indian IT firms.

Trying to get their offshoring model right, multinationals like IBM, Accenture, EDS, Cap Gemini, Atos Origin among others scaled yp their India operations significantly. EDS and Cap Gemini took the acquisition route to leapfrog into the offshoring arena to enhance their India footprint. EDS acquired majority stake in mid-sized software services firm MphasiS, while Cap Gemini acquired Kanbay, which has a major presence in India.

Scramble for talent

But the struggle continued for human resources as scramble for talent intensified. Factors such as wage inflation and attrition among others continued to haunt IT services vendors. Despite rising wages in India, which are seen growing at 15-18 per cent annually, the cost advantage for global corporates still holds good.

As outsourcing gained momentum, Indian vendors were seen compelled to stretch their employee utilisation levels to service the increased order flows. The scramble for experienced staff is further compounding the problem. As a result, several vendors were looking at creating a strategic bench to meet just-in-time manpower requirements.

With Tier I vendors growing at a frenetic pace, the gap between the top tier and mid-tier vendors seems to be widening further. Lack of scale is still a major issue for the mid-tier firms. As a result, consolidation seems inevitable in the midcap space.

Notwithstanding concerns of a slowdown, Indian IT vendors seemed well placed by broad-basing their service offerings to absorb shocks. The improved visibility of deal pipeline did prompt frontline companies like Infosys, Satyam and Cognizant to increase their full-year earning guidance.

New services growth

The new service offerings, introduced in the past few years, have come with great force and have started accounting for a large chunk of the revenues for many vendors.

Further, the opening of the European market seems to augur well for Indian vendors, who are garnering more revenues from Europe, considered the next frontier after the US, as compared to two years ago. Wipro, Subex, Sasken, Sonata, Saksoft, KPIT Cummins among others were seen active in the European market. Four of the six firms that Wipro acquired during the year were in Europe. Subex Systems acquired Azure Solutions, a British Telecom spin-off in a $140 million deal, considered to be the largest buyout by an Indian firm.

Multi-sourcing reality

With the dynamics of the global outsourcing market undergoing a change, the mega deals that one witnessed in the earlier years gave way to multi-sourcing, which became more prominent during the year as clients outsourced to a mix of Tier I and best-of-breed Tier II vendors. The Indian vendors continued to grab market share in competition with traditional multinational players. Indian vendors have gained market share and currently possess about 25 per cent of the ADM (application development and maintenance) market value.

Positive market indicators, including large un-addressed white spaces and the unbundling and/or renewal of mega-deals with increasing shares of global delivery, strongly support the industry's optimism in achieving its aspired target of $60 billion in exports by 2010. Exports are expected to demonstrate growth of 28-30 per cent in 2006-07.

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