"Competition For Contracts Will Transform The Indian Industry"

The advent of global services vendors in India and other low cost offshore locations has meant that Indian IT outsourcing services providers have had to create deep domain expertise in order to compete effectively with their foreign counterparts. However, the trend could have a number of serious implications on matters such as cost and economics of outsourcing core IT systems development to Indian IT vendors.

Sandeep Hebbar, analyst at research and consulting firm Celent talks to Biztech2 and shares his views on this trend among the Tier-I outsourcing vendors.

Are global customers realising the efforts made by our IT outsourcing vendors to create domain excellence?

Yes, there is a tangible difference in how the global customers perceive the domain capabilities of the Indian IT vendors now, as compared to the start of the century. This recognition is a lot more within the global customer community that has worked with the Indian IT vendors continuously over the past 10 years. These include names such as Deutsche Bank, Goldman Sachs, Wells Fargo, Morgan Stanley etc. However, the banks that have had limited dealings with the Indian IT vendors (many of the European banks) are still relatively dismissive about the Indian vendors’ capabilities.

More from Biztech

Future Group - Reliance Retail Deal approved by CCI RBI ban on cryptocurrencies takes effect; prohibition could force investors to tap the black market

Is this trend strictly isolated to the tier-I outsourcing companies?

Yes, it is limited to the tier I and some of the tier II companies.

Don’t you think that by following this trend our companies run the risk of loosing the low-cost charm of the past?

Well, the Indian vendors have no choice. Now that the workforce in India and other low cost countries of IBM, Accenture, HP, EDS and a host of smaller global service firms match the overall workforce at each of the Indian tier I and tier II vendors, a lot of the straightforward application development and maintenance contracts are now being won by these global firms.

In 2000, the price difference between the Indian IT vendors and the global firms for these contracts was in the range of 60-150%. Now, the difference has become negligible – around 5% to 25%. In addition, there is further competition from firms in Eastern European and Latin American countries.

While the prices for the “lower end” services has converged, the global firms still charge a high premium for the “higher end” services, especially the initial consulting engagement where the business problems are studied and a high level solution is proposed. With their experience on working with the top global customers and some of their advanced solutions, the Indian vendors believe that they can offer similar levels of service for a discount.

So, they are still playing the low cost value proposition. Many of the consulting contracts won by the tier I companies is due to their low cost pricing.

In addition, during much of the ‘80s and ‘90s, the Indian vendors did not bid for complex core systems projects as they did not have the capabilities to build them. Since the top vendors now have the relevant experience, this opens up a much larger market. So, the costs associated with building domain capabilities (recruiting industry veterans, training and education) are justified by the larger market that is now open to them.

Is it still the “economic viability” that drives the Indian outsourcing industry or have we moved beyond the low cost label?

It is a combination of economic viability and superior quality. Although the low cost tag has stuck to the Indian industry, quality and customer responsiveness have been very critical for the Indian success story so far.

The Indian vendors hope to add the domain knowledge factor to their offerings and have progressed fairly so far.

Is consulting going to be the next big thing?

No, consulting capabilities serve as a gateway to winning rest of the system development and maintenance contracts. In a typical 3 year contract, the initial consulting engagement does not account for more than 5-10% of the total contract value. Earlier, the consulting engagements typically would go to one of the big global firms and the Indian vendors would win the downstream contracts. However, as mentioned before, the global firms are bidding for and winning the downstream contracts too. So, with the Indian vendors developing their consulting (and complete infrastructure management) capabilities, they are in a much better position to win the downstream contracts as well.

In short, the growth machine for the Indian vendors is still going to be the ADM projects; consulting capabilities will enhance their chances of winning these contracts and of winning a new set of complex IT system projects.

Do you think it’s about time Indian vendors started exploring opportunities on the domestic front?

They are already doing that. A crucial factor to note is that the Indian financial industry was regulated and didn’t face much competition till 2000-02. Electronic Fund transfer was implemented in India as late as 2004. The Indian capital markets are still very simple in terms of the instruments available for trading. Much has changed in the Indian financial industry – banking, capital markets and insurance – in the last 4-5 years with friendlier regulations, high competition and the heavy fund inflow into the markets. Over the same period, the Indian financial industry has heavily invested in IT and the Indian IT vendors have largely won most of these contracts.

How serious a threat is the arrival of global services players into India and other low-cost offshore locations?

It is very serious. Competition for workforce is already affecting both the big and smaller service companies seriously. Competition for contracts will significantly change the Indian industry landscape over the next five years. The industry is likely to witness a lot of consolidation and many of the smaller IT and BPO firms will either fade away or be acquired by the big Indian or global firms.
However, the overall outsourcing to India will continue and the tier I Indian vendors will thrive as India still has a small (but growing) share of the $40 billion annual outsourcing contracts in the financial industry.

How’s the “multi-sourcing” phenomenon going to affect the overall picture?

Multi-sourcing has been around for the past 4-5 years and will continue to be the preferred sourcing strategy for many of the big customers. The industry as a whole has gained from this in terms of experience and revenues, but at a lesser margin.