'Indian firms face an uphill battle to replace the revenue compression that is affecting their legacy business. They face new competitors in digital markets who have strong advantages over Indian firms.'
IMAGE: Indian firms are undercutting each other to win more traditional services contracts, affecting their overall growth. Photograph: Reuters.
India’s software exporters seem to be the new incumbents in the global technology outsourcing space. In the next two years, clients such as BNP Paribas, Procter & Gamble, Johnson & Johnson, Citigroup and DuPont will look at their existing contracts and ask global information technology (IT) services firms to bid for them.
IT outsourcing advisory Information Services Group, estimates 5,565 contracts -- valued at $201 billion -- are up for re-bids across geographies and verticals by 2018.
In the past, Indian vendors such as Tata Consultancy Services, Wipro, Infosys and HCL Technologies have won outsourcing contracts, bidding against global firms such as IBM, Accenture and Capgemini pitching costs savings and delivering value through their offshore presence in India.
They also cannot count on cost arbitrage, a model they have built over three decades, as global firms have replicated that by building huge offshoring base in the country.
They are just about building capabilities in emerging segments such as digital technologies, where budgets are growing, while they cut spending on traditional IT services.
“Indian firms face an uphill battle to replace the revenue compression that is affecting their legacy business. They face new competitors in digital markets and these competitors have strong advantages over Indian firms,” says Peter Bendor-Samuel, chief executive officer (CEO) of Everest Group, the global technology researcher.
“For example, the Big Four accounting firms are taking substantial share in these markets and have strong client access capability, which is hard for the Indian firms to counter.”
The re-bid deals itself could see a different shape, says Sanchit Vir Gogia, CEO of Greyhound Research, “where global customers would look at acquiring technologies and companies that help in automation; outsource locally and look at offshoring as a final option”.
Firms such as Wipro and Infosys have admitted the pace of growth in emerging areas such as digital is not offsetting the fall in traditional IT services.
In fact, Indian firms are undercutting each other to win more traditional services contracts, affecting their overall growth. Infosys and Cognizant have cut revenue forecast twice this year, as they struggle to grow, while Wipro has projected flat revenue for the quarter to December.
“(It is) a mature market which there are few new entrants, which means the Indian firms are going after each other’s clients now instead of the less advantaged multi-national clients. This is driving a hyper competitive-pricing environment,” says Bendor-Samuel.
Constellation Research, a strategy advisory firm, says 61 per cent of the global top 2,000 firms are engaged in digital transformation, with 73 per cent of chief executives expecting budgets to increase in 2017.
Infosys concedes there are challenges to shift to the new model, where customers need help in shifting to adoption to cloud and digital.
“Today, our traditional business is under pressure; there is pricing pressure. In today’s era, every client is grappling with how to leverage technology. So, the traditional consulting, which is about the best in class, best practices, may not apply in these cases,” said Pravin Rao, chief operating officer, Infosys, at a recent CLSA analyst meet.
“Any company, which can help clients discover what the critical problems are to solve and then bring in technology capability, will stand a good chance.”
Ray Wang, principal analyst and founder of Constellation Research, says any blips for Indian outsourcers would only be short-term.
"Right now, the deal sizes are smaller. The space is growing; they aren’t necessarily losing out to Accenture, IBM, or Deloitte, but the type of services is more consulting and less residual subscription businesses. Over time, we can expect the bundling of infra, business process outsourcing, consulting, and other areas to happen with digital deals."