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Despite boom, over 500 IT offshore firms struggle to survive

Despite boom, over 500 IT offshore firms struggle to survive
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First Published: Wed, Apr 04 2007. 06 53 PM IST
Updated: Wed, Apr 04 2007. 06 53 PM IST
While corporate pundits wax eloquent about the great Indian offshoring saga, a recent study by global research organization Forrester reveals there may be trouble brewing in paradise.
Though it is far from doomsday for this sector, the report — The Polarization Of Indian Offshore Providers Accelerates — talks about the marginalization of 500 small and mid-sized firms that are performing below the industry average. The numbers and qualitative data thrown up in the study seem to point towards a shakeout of the kind seen in the financial services industry in the 1990s.
The reports says of the 700-plus IT companies in India, the top three players alone — Infosys, Tata Consultancy Services and Wipro Technologies — will hog more than 40% of the IT services export revenue pie in 2006-07. Just two years ago, their share was only 26%. The report says these three firms have continuously increased their profitability amid mounting multinational corporate competition, rising staffing costs and attrition, and growing deal complexity.
Most small and medium-sized firms, on the other hand, have been incapable of specializing and matching the scale and volume-pricing of the top Indian firms. As a result, their revenues and profitability increased only 20% and 10% on average respectively, under-performing the top three on both sales and margins.
The report says that while several sub-$1 billion revenue companies are either facing survival challenges or acquisition, those like Cognizant, HCL Technologies, and Satyam, which crossed the billion-dollar mark in 2006, demonstrate middle-of-the-road behaviour that puts them in a state of flux. They may swing in either direction — toward the success of the top three or toward getting lost in the crowd of 700 other firms.
The challenges faced
Increased merger and acquisition activities, the entrenching of global services firms, and increasing client maturity have changed the industry scenario. With staffing costs mounting by 12% to 15% annually, firms like Covansys that produce single-digit growth in profits and revenues must change to remain competitive.
The report says some of the most severe challenges that these firms face include
? Diminishing brands that fail to attract the best talent, with MNCs and the top Indian IT firms dominating premium recruitment options;
? A dispersed client base — brought on by the propensity in the later 1990s to pick up any business that came their way — that inhibits smaller firms from building up domain skills;
? A hand-to-mouth business situation that blocks future strategy development.
Recommendations
Since these companies are entrenched in a vicious circle with no recovery in sight, the time has come for them to take a tough call on their future. Options are running out, and they need to either super-specialize or merge with other firms in order to survive.
The report also estimates that more than 200 companies use services from one or more small or mid-sized Indian providers. Forrester’s advice to such clients is to continuously check on providers’ viability by comparing their growth and profitability with the industry average, and analyzing their portfolio of client engagements to see if they are spread too thin. The report recommends creating a plan to migrate to another firm if their comfort levels with the existing one are low and if the work on hand can be easily contracted to another service provider.
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First Published: Wed, Apr 04 2007. 06 53 PM IST
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