Ruth David, 05.29.07, 12:00 PM ET
Mumbai, India -
Telecom is a sector where Indian outsourcing has seen the largest deals. India is the world's fastest-growing mobile market, adding about 6 million subscribers annually. As companies ramp up, they're resorting to outsourcing to ensure that the technology keeps pace with expansion. In India's case, it means anything done outside the corporate wall, even if it's just down the street.
IBM, which signed a 10-year contract valued between $600 million and $800 million this year to manage Idea Cellular's outsourced technology operations, Electronic Data Systems and Accenture are among the global companies pursuing deals in high-growth sectors like retail and telecom. In 2004, Accenture signed a 10-year outsourcing agreement with leading consumer goods major Dabur.
But Indian companies' reasons for outsourcing are different from their counterparts in the West, where the motivation is primarily cost saving, says Inderpreet Thukral, director for strategy and business development at IBM India/South Asia.
"In India, the primary motivation is scale--how do companies scale back office and IT. Also, because of the large software services market in India, it is harder for small companies to attract talent. For those two reasons, outsourcing becomes a good story," Thukral says.
Software and services spending is now outweighing companies' hardware expenditures, says tech industry body Nasscom. India's technology market is predicted to reach about $16 billion by the year's end.
That market is still predictably small, but it's now growing at rates of above 20% annually, and Nasscom predicts that number could touch around 35% if the government starts opening up more to outsourcing. By contrast, worldwide spending on tech-related products and related services passed $1.5 trillion in 2006, though it grew only at a rate of 7.7%.
India isn't yet a homogenous market, says Rajdeep Sahrawat, vice president at Nasscom. "If you take the top 100 firms, there is little difference in their maturity and that of their global peers. But for small and medium firms that haven't yet developed technology to a point where they can outsource, software services companies need to create an environment for them to outsource. They need to invest in the market to educate customers."
Multinationals, because of their experience in developing markets, have an edge over Indian companies when it comes to outsourcing by small and medium-sized companies, says Sahrawat.
"When Microsoft launches a product, they do so much pre-launch activity. Indian firms don't have as much experience," he says, adding that when it comes to top-tier contracts, Indian and global majors are on an equal footing. "Size doesn't matter when it comes to outsourcing large contracts. It hinges a lot on culture, whether they're comfortable with a likely partner."
And companies like Bangalore-headquartered IBM, which grew at a rate of 37% in India in 2006, are ramping up investments in India to ensure they are in a position to capture as much of the market as possible. They don't want just the small deals, emphasizes Thukral.
"Our [10-year] outsourcing deal with [Delhi-based real estate developer] DLF was $29 million. It was a big step for them, but for us it wasn't any different. Clients understand that IBM is just as effective and responsive as when we do large deals," he says.
But the edge enjoyed by global companies is disappearing as Indian software majors, which now earn the majority of their revenues from U.S. and European markets, focus on domestic clients.
One such company is Wipro, which last year saw over 20% of its revenues come from India. "We have a separate team focused on identifying opportunities, doing concepts, selling to potential customers. The last three deals were in the range of $60 million to $80 million," says Amin Raibagi, Wipro's general manager for sales and operations for outsourcing. Over the next five years, the Indian market could see 50 deals in the $100 million range, he says.
Though Wipro doesn't yet have deals as big as, say, IBM's, Raibagi says the company is confident of generating revenues through a host of smaller deals. Bangalore-based Wipro's largest such deal recently was a 10-year outsourcing contract with HDFC Bank, for $80 million.
Tata Consultancy Services, India's largest software service major, last year saw over 10% of its revenues come from the Indian market. But the company is not interested in large hardware plus software deals and often stays away from them internationally as well, says spokesman Pradipta Bagchi. "We're more interested in mission critical deals," he says.
TCS, which handles IT for market leader State Bank of India, is also not looking at deals that involve the transfer of assets, because they involve margin dilution, he says.
For Indian companies, smaller deals allow more time to understand complex processes and help them build relationships, says Anish Zaveri, associate director for Advisory Services at KPMG. "Indian IT companies do not have large overheads like the multinational IT companies. So they do not need to sign large deals to keep them going," he points out.
The domestic services market is highly fragmented, says Forrester Research's India head, Sudin Apte. "In some industry spaces such as banking and financial services, you see enormous competition, and then in small and medium businesses and technology-laggard industries, you see several local, relatively unknown firms work," Apte says.
Several companies that compete for offshore services, including Infosys Technologies and Cognizant, do not participate in the domestic market at all, except Infosys' interest in its own core banking applications, says Apte. Last year, only about 2% of Infosys' revenues came from India.
But Infosys' CFO, V. Balakrishnan, emphasizes that the Bangalore-based tech major is definitely interested in the domestic market, though maybe not immediately. "India is just opening up; it's still an immature market. Outsourcing is a growth story, not an efficiency story. … We play the efficiency game, and we work with large global companies," he says.
Once the market matures, Infosys will enter it in a large way, says Balakrishnan. And with the way outsourcing is growing in India, it looks as if there will be enough space for both global and domestic players to grab multibillion-dollar contracts across a range of sectors.