India’s large software services firms are getting bigger and they are doing so at a faster rate than their smaller rivals, with overseas customers looking for companies that are big and have the ability to provide a range of services. The companies, Tata Consultancy Services, Infosys Technologies Ltd, Wipro Ltd, Satyam Computer Services Ltd and HCL Technologies Ltd—together, they are called the Big Five or tier I of the Indian IT industry—receive $4 (Rs168) of every $10 that global corporations spend on outsourcing software and back-office services to India. And, despite their growing size ($1 billion to $4 billion), all of them continue to expand revenues (see chart) between 35% and 45%.
Two years ago, the three largest of these companies accounted for a fourth of total exports of software services out of India; today, they do a third.
What this means is that tier II Indian software service firms with revenues less than $500 million are finding it tougher to bag tech contracts from overseas clients, who are getting increasingly comfortable dealing with the country’s top five software exporters.
Sudin Apte, the Pune-based head of the local unit of Forrester Research, wrote in a report his firm released in March that while a handful of offshore players, and in particular the top three, are performing exceedingly well, more than 500 small and medium-size firms are struggling and performing below the industry average. Big firms are growing and remain highly profitable, whereas their smaller peers make very small profits and are vulnerable, he wrote.
Of the more than $30 billion software exports from India, the top five firms contributed almost $12.7 billion or more than 42% in 2006-07. While TCS crossed the $4 billion mark in revenue for the year to March 2007, both Infosys and Wipro crossed $3 billion in sales for the year. Even companies such as Satyam and HCL, seen as slower-growing companies in the pack, rode the momentum by growing their revenues to over $1.5 billion and $1 billion, respectively.
Outsourcing to overseas locations for leveraging a cost effective labour pool is being used as an effective tool by chief information officers of global corporations. New customers do not want to spend time acquainting themselves and their vendors with the dynamics of outsourcing the way early outsourcers such as General Electric did almost a decade ago. Those new to the game “are in a hurry now, leading to a very strong demand environment,” said Wipro’s chief strategy officer Sudip Nandy.
A key reason for the concentration of business in the Indian software industry is the sheer strength of the workforces of the Big Five and the ability of these firms to grow bigger at 30-40% every year. For instance, TCS, Wipro and Infosys are expected to cross the one lakh mark in terms of software workers employed, sometime in 2007-08.
“In instances where a customer is a large player, he looks to source multiple services from few vendors. Therefore, companies that have the size have the relative advantage to attract major customers,” said Satyam’s chairman and managing director, Ramalinga Raju.
The comfort levels of the Big Five with clients help too. Large outsourcers such as American Express Co., Citigroup NA and General Motors Corp. are now almost a decade old in terms of offshoring to India and are consolidating with a few vendors. “As these customers move to a more committed offshoring approach, they are selecting vendors based on scale and profitability apart from stable balance sheets,” Forrester's Apte said.
Wipro’s Nandy refers to The Rule of Three, a book by Jagdish Sheth, a professor of marketing at Emory University in Atlanta, US, and a member of the company’s board since 1999. Sheth describes the gap between the top three and others companies as “the valley of death”.
“We have moved away from the offshore versus onshore debate and are now clearly looking at tier II versus tier I battle,” Nandy said in an interview on Friday, a little after Wipro reported a growth of 38% in sales to nearly Rs11,100 crore.
Large outsourcers such as the world’s second largest pharma company, Glaxosmithkline Plc. (GSK), which is estimated to be spending almost $1.2 billion on technology every year, are turning to Indian vendors such as TCS, Wipro and Satyam for application development and business process outsourcing work.
“We saved round $30 million last year, and aim to save $290 million in technology costs by 2009 through offshoring,” Ian M. Hau, senior vice-president, global services and applications, GSK, had said in a February interview. GSK’s bigger rival Pfizer Inc. also works with TCS, Satyam and Wipro and “aims to save over $300 million in the next three years,” according to Pfizer’s senior vice-president of worldwide technology, Jonathan White. Both Hau and White spoke to Mint in Mumbai while attending an industry event.
Smaller tech vendors iGate Global Solutions Ltd, Mastek Ltd and several others will also face increased competition for new business and talent as global tech majors International Business Machines Corp., Accenture and Electronics Data Systems Inc. expand footprints in India, analysts said.
What used to be a competition between the top tier and mid-tier Indian players has now become a market share battle pitting the top five Indian vendors against global biggies such as IBM and Accenture. “These leading vendors have broken away from the pack, and the only option for tier II players is not to play the scale game, but focus on niche skills,” said Siddharth Pai, partner with the Bangalore-based outsourcing consultant firm Technology Partners International.
“Don’t forget that Infosys gave up work for GE in the mid-1990s because of pricing issues,” said an analyst with a Mumbai-based financial brokerage firm who did not wish to be identified. iGate, for instance, serves customers such as GE and Royal Bank of Canada.
K. Raghu and C.R. Sukumar also contributed to this story.