Private sector has continued to look at outsourcing and offshoring, despite government's measures.
The UK government's ratification of the £600-million (around Rs 4,296 crore) deal to Tata Consultancy Services (TCS) to set up the information technology (IT) infrastructure and administer its revamped pension scheme highlights the significance of the outsourcing industry.
The private sector in the US, too, has continued to look at outsourcing and offshoring to tackle cost pressure, despite the government taking protectionist measures.
As a result, Indian service providers have been steadily increasing their market share since 2000. According to the third quarter TPI Index, Indian-heritage providers - TCS, Infosys Technologies and Wipro, among others - have achieved 20 per cent share of the total contract value (TCV) awarded since 2007.
The TPI Index, which measures commercial outsourcing contracts valued at $25 million or more, said Indian services companies have bagged 27 per cent of the number of contract awarded for 2010 (year to date), up almost five per cent from 22 per cent in 2007 - one of the highest year-on-year increase since 2007.
Traditionally, multi-national companies - IBM, Accenture and HP, among others - have managed to maintain a lead in deal sizes above the $25 million range. They maintain their lead in terms of the total TCV of contract awards with 58 per cent in 2010 (YTD).
One reason for the shift is that deals are getting smaller. "There are a bunch of contracts that have been renegotiated. Rather, the Q3 TPI Index points to a higher instance of renegotiated contracts. While most deals have gone to major players including Indian firms, several deals are getting broken into silos and this is where the Indian players are gaining," said Siddharth Pai of TPI.
For 2010, of the deals up for renegotiations, 13 have been won by Indian companies. Restructuring activity, that includes renegotiations, renewals and extensions of existing outsourcing contracts, totaled $6.8 billion during the third quarter, or 48 per cent of the global market.
The average TCV size has also declined. MNCs and Indian IT services firms are converging on the middle of the market, with $25-199 million deal sizes proving to be the battle ground.
"I agree that deal sizes are moving away from the billion range to the million range. The other reason for the Indian IT services to gain share is due to the budget constraint. From the earlier days of double digit IT budgets, for many firms in the US this has come down to single-digit.
While the customer's IT budgets are getting smaller they still need to deliver services and that is pushing the offshoring trend," said Sudin Apte, principal analyst and CEO, Offshore Insights.
This is also reflecting in the revenue share of Indian service providers vis-a-vis the MNCs. According to the TPI study, five years before Indian IT services firms garnered six per cent of the total services revenue compared to 94 per cent of the MNCs.
At present, however, Indian players have increased their share to 13 per cent.
Apte said post slowdown, clients are increasingly looking at offshoring. "If offshoring was 30 per cent, clients are saying take it up to 70 per cent. This is one way of cutting cost and that is paramount today. Clients are also looking at better control and vendors who are open to change. That flexibility is there among Indian IT players. And, more important, the pricing parity."
However, Avinash Vashistha of Tholons said MNCs get a sizeable chunk of their business from the systems integration (SI) segment, where Indian companies do not have considerable presence.
"It is a low margin business. While Indian players are not being able to compete with MNCs, they are also not interested in entering this segment. Hence, we will continue to see MNCs having a larger portion of the market."
Indian companies are expected to have a compounded annual growth rate of 10.8 per cent for the next three years.
Further, more investments in front-end capabilities are also bearing fruit for Indian IT firms. "Hiring locals need not necessarily be due to protectionist voices. As Indian companies grow and become real competitors, move to more consulting work, they will have to hire more experts onsite," said Pai.
Take Tata Consultancy Services: It has set-up a centre in Cincinnati and is hiring locals to tap the government and health sector. Similarly, Infosys Technologies has stepped up hiring in the US, partly infused by the rise in visa fees. It also aims to garner more consulting work.
"Moreover, a lot of the deals have an onsite component. Even earlier, Indian service providers would have onsite people but they were technical specialist. With more onshore presence, the share of deals that the Indian IT services have managed to grab has gone up as they get into business discussions," said Vashistha.
