The double-digit growth rates of Indian IT service providers have long been the envy of their Western counterparts. But as the offshore outsourcing market matures, India's outsourcers will have to move beyond the lower level IT work that got them where they are today.
Indian IT service providers grew at a combined annual growth rate (CAGR) of 32 percent between 2005 and 2008 compared to just 7 percent for Western outsourcers, according to outsourcing consultancy and research firm Information Services Group (ISG).
In the last three years, growth has slowed. Between 2009 and 2012, Western providers delivered just a 0.4 percent CAGR while Indian outsourcers fell to 16 percent, according to ISG.
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"[Indian provider] growth is now slowing since they have begun to reach high levels of market penetration," says Sid Pai, partner and president for ISG Asia Pacific, says, "so the onus on them is to find ways to continue progressing by expanding into solutions and industry-focused software products."
While Indian companies continue to outperform their Western equivalents, a sluggish IT outsourcing market overall could start take its toll one some India providers this year.
[Related: Is IT Outsourcing a Dying Concept?]
"[That will] drive down margins further as competition gets even more intense," says Phil Fersht, president of IT outsourcing analyst firm HfS Research, which is predicting a slight 3.5 percent growth in IT services deals in 2013. "We may even see one [Indian provider] post negative growth in this slowing market."
"Ongoing margin pressure and an increasingly competitive environment will make it difficult to maintain even those reduced growth rates," says John Keppel, partner and president for ISG North Europe. "For India-heritage providers, changes in strategy -- some subtle and some not so subtle -- are required."
Firms that continue to focus on transactional low-end, low cost work may miss out on the next wave of IT services investment. "The market trend towards smaller deals and multi-sourcing is moving some business away from commodity offshore-based models, towards niche players as well as onshore-based models," says Rakesh Bhatia, senior associate of outsourcing consultancy Pace Harmon.
"It's time for these providers to make the necessary investments to continue their growth journey," says Fersht, "or they can start to look at some rather interesting case studies of providers in the Western world who failed to keep up with the times."
Indian IT outsouring service providers should take this eight steps to ensure continued growth:
1. Hire IT Expertise Abroad
Indian firms need to up their consulting and domain specific expertise, says Atul Vashistha, CEO of offshoring consultancy Neo Advisory. And they'll have to look outside India for that.
"The India-heritage Tier 1 [providers] have recognized that growth of some of their highly commoditized services is threatened and they are dealing with it in various ways," says Bhatia. "They are growing their non-Indian employee base at a faster rate and performing strategic acquisitions outside India to reduce the leakage of their business to smaller onshore competitors."
"The future is going to be less about selling the low-end work, but the more complex IT-enabled business processes that are specific to industries. Hence, the investments the providers need to make are going to be in more consultative talent and specific technology IP," says Fersht of HfS Research. "And you can't find all of that for cheap rates in a third-tier Indian city."
2. Crack the Public Sector
Protectionist legislation will continue to inhibit India's growth in public sector IT outsourcing, but some opportunities exist. "Public sector contracts are large, complex deals are expensive to win, but they are also sticky and profitable," says ISG's Keppel.
3. Spend That Cash
"Top Indian companies are flush with funds, but are obsessed with protecting their cash hoard rather than making proactive investments in their business," says Pai. "This needs to change."
Some Indian providers are setting aside significant portions of their reserves to invest in newer, less commoditized IT services--those that sit at the intersection of IT and the business or incorporate social, mobile, analytics, or cloud computing, says Bhatia.
"The seismic shifts underway in the technology space mean getting zero revenues in the first couple of years and investing in building potentially lucrative solutions for customers," says Pai. "They have to move the needle and stop focusing on butt-on-seats business. They have to build or buy their way into this new business model."
4. Embrace Automation
Indian providers must break the mold of linear growth that requires greater investment in full-time employees in order to increase revenues, says Fersht of HfS Research. "This means more investments in automation and business platforms that can increase work volumes without increasing staff numbers.
5. Sell to New CXOs
Indian providers looking for new business ought to look beyond the CIO's office. "Taking leadership positions in newer trending areas is giving them the ability to expand their footprint at existing clients by selling services outside of the CIO's organization," says Bhatia.
6. Act Global
With nearly $10 billion in revenues and operations across dozens of countries, large Indian outsourcers could be labeled multinationals. But they don't behave like multinationals, says Pai. "They have few foreigners in top management. They continue to have a centralized management structure," he adds. "Their customers don't want an Indian or foreign provider, they want a global technology services vendor." Win the Restructuring Market
More than half of outsourcing deals up for renewal today are going to non-incumbent providers. "With the renewal and restructuring market growing, they need to learn to effectively compete for second and third generation deals," says Esteban Herrera, partner with ISG. "But they will also soon find themselves having to defend their own deals when they reach maturity."
7. Go BPO
Business process outsourcing, IT outsourcing's younger cousin, remains a higher-growth area. India currently holds about 36 percent of the market, according to ISG, leaving plenty more to acquire. "Sustained growth will require not just success but dominance of the BPO market," says ISG's Keppel.
8. Focus on Outcomes
"India's biggest IT companies have earned their billions from a well-oiled business model focused on the proverbial low-hanging fruit of application development and maintenance," says Pai. "This business model - which is based on hourly billings of thousands of software pros - appears to be wilting. The time may have come to move to an outcome-based business model, which focuses on giving customers complete solutions, not bits of software."