IDG News Service — Small and medium-size Indian outsourcers are gaining favor with customers during the recession because of the lower prices they can offer, and also because they are willing to take up smaller contracts, according to Forrester Research.

The larger Indian vendors have been reluctant to drop prices, Sudin Apte, senior analyst at Forrester, said on Thursday. They have also not been able to communicate to some clients the value of doing business with them, he added.

The large Indian outsourcers are also not keen on smaller orders of less than about US$6 million a year, Apte said. As large Indian outsourcers like Tata Consultancy Services and Infosys Technologies start competing with the likes of IBM and Accenture, their focus is on large deal sizes, which leaves a significant part of the market vacant for smaller players, he added.

Some of the small and medium-size firms offer specialized services and expertise in certain industries that are also attractive to clients, Apte added.

There is a clear opportunity for small and medium-size outsourcers as clients are placing smaller, specialized orders, rather than larger contracts, said Siddharth Pai, a partner at outsourcing consultancy Technology Partners International (TPI).

Some smaller outsourcers can compete effectively with the larger players on small orders that do not require large-scale deployment of staff, Pai said.

Clients who have outsourced for a long time are now confident that they can manage more vendors, Pai said. By having more vendors, clients can generate competition, and get better terms from them, he added.

A trend to consolidate vendors has been noticed among some clients. BP for example announced last month that it was cutting its service providers for application development and maintenance to five from 40 earlier.

The number of suppliers after consolidation will still be about five to seven, and may at times include a mix of large, small and medium-size vendors, Apte said.

Forrester has however warned in a report that clients should not rush to sign up small and medium-size outsourcers on the basis of their lower prices alone.

The lower billing rate may not necessarily translate into lower cost of delivery, as some of the smaller companies may have lower productivity and be unable to handle complex projects, Apte said.

Evaluating rates alone may be good enough for low-skill and fairly commoditized types of work, Forrester said. But in many other types of work, customers need to evaluate more complex factors such as the future value of the relationship and service innovation, Forrester said.

Clients should instead focus on the vendor's specialization, which could take the form of specialization around a technology, an industry vertical or business process, or the vendor's ability to offer "a unique client experience" across the outsourcing life cycle, Forrester said.

They are about 400 small outsourcers in India, and not all of them can offer specialization of value to the customer, Apte said.

Many small and medium-size outsourcers have started specializing in certain niche areas of expertise, Pai said. "That is the only way they can survive in the long term, against competition from the larger players," he added.