India's top outsourcing companies will likely become the next generation of "megavendors" for IT services by 2011, competing for deals worth more than $1 billion, analyst Gartner said Wednesday.
Tata Consultancy Services, Infosys Technologies, and Wipro will increasingly compete with other top players such as IBM, Accenture, and EDS for those large deals, Gartner said.
The top Indian outsourcers, called the India-3 by Gartner, are more frequently being invited to bid on large deals that were earlier closed to them, said Partha Iyengar, a Gartner analyst.
Multinational service providers like IBM, EDS, and Accenture have set up large offshore service operations in India to take advantage of low-cost staff. But they are not fully getting the benefits of this offshore strategy, even as customers in the U.S. and other countries are increasingly looking at a mix of onshore and offshore delivery, Iyengar said.
Sales teams of multinational service providers are also more likely to sell U.S. clients more expensive onshore service plans because their commissions are tied to value of those deals, Iyengar said. The onshore and offshore delivery teams of the multinational services providers are not as well integrated as those of Indian outsourcers, he said.
Large services companies like IBM are still likely to get deals larger than $6 billion, but increasingly the deals are being split into smaller but still high-value orders, Iyengar said. That is a significant opportunity for India's top three outsourcers, he added.
India's top outsourcers can now compete effectively with the top three global service providers on large deals, but they have to be willing to hire their customer's staff and also take the customer's IT assets onto their own balance sheets, said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International.
"I have not seen a great willingness yet by these companies to do that," Pai added.
To compete with other service providers on large contracts, India's top outsourcers must also be willing to build service delivery branches outside of India, Pai said. Currently most of the staff of these companies is in India. Investors also have higher margin expectations from Indian companies, which gives them less elbow-room to trade margins for newer business, he added.
Gartner also holds that Indian vendors will have to make significant changes in their business models to compete with the top three services companies.
For example, the top three Indian outsourcers will have to move away from hiring more new employees in order to maintain revenue growth. They will also have to achieve similar levels of revenue per employee as the top vendors, Gartner added.
The revenue per employee of the top Indian outsourcers is far lower than that of IBM, Accenture, and EDS. In 2007, IBM's revenue per employee was $146,910, Accenture's was $130,200 and EDS's at $154,340.
Indian companies had far lower employee productivity: Tata Consultancy Services' revenue per employee in 2007 was $51,320, while that of Infosys was $45,800 and for Wipro, $41,310.