 "Non-Specialist IT Providers To Refocus To Grow Business")
According to the latest Forrester report, the majority of sub-billion-dollar IT firms is falling prey to a staff augmentation deathtrap and is increasing headcount without corresponding returns. Forrester predicts that many firms will shed up to 30 percent of their current clients to pursue a more specialised strategy and rebuild competitiveness as competition on their home turf gets fierce due to advent of tier one and specialist Indian as well as MNC players.
The Forrester report – Surviving The Offshore Vendor Polarisation Puzzle – by senior analyst Sudin Apte, clearly states that while the top three and specialist Indian players continue to excel, most other sub-scale, non-specialists are struggling to grow their business and demonstrate value to their clients. Many of these providers have added a huge army of new recruits in the past two years but unlike, especially the top three players, these firms fail to grow revenue in proportion to the headcount increase.
Apte says, “Polarisation between the offshore providers in India has accelerated. Fast growing and enviably profitable, India’s top three providers — Infosys, Tata Consultancy Services (TCS), and Wipro — now drive almost half of India’s total IT services exports by value. While Cognizant, HCL, and Satyam still hold their ground and continue to grow, most non-specialised and undifferentiated tier two and tier three firms stand to lose out because margin pressures do not allow them to invest enough in building specialisation or take proactive initiatives to help clients ramp up.”
In his report, Apte warns the financial analyst community tracking IT firms that they can no more rely on the conventional offshore equation plainly linking revenue growth with the headcount growth. He says, “Financial analysts’ continued use of obsolete metrics such as ‘number of people added in the quarter’ actually push a ‘body shopping’ mindset in the tier two suppliers. And to meet stock market expectations, these firms continue picking up customer business all over the map in terms of skills, service lines, and industries served – ultimately lacking specialisation or niche play.”
Commenting on the future moves of such sub-scale, non-specialist vendors, Apte predicts, “In an all-out survival attempt, these firms will initiate a strategy overhaul and take steps such as divorcing non-strategic clients or shifting from a pure services play to an IP or solution accelerator proposition. I also see them making niche acquisitions – in stead of sell-out, as a way forward. Forrester’s analysis shows that apart from the barrier of complex ownership structures, the top executive mood to rebuild the organisations will prevent any mass M&A in this space, unless these firms face negative cash flows. On the contrary, we expect to see more boutique capability acquisitions as these tier two providers set out to boost their IP assets.”
On a concluding note, Apte opines, “A majority of the Indian sub-scale, non-specialist IT players, in early 2008, was in pubic denial of looming trouble that may marginalise hundreds of them. However, we now observe that many offshore industry leaders are now suggesting a radical course correction in the way they sell their services.”