Indian outsourcers continue to make gains

Large offshore Indian vendors of IT services continue to make gains and have begun to pose a serious threat to the top global players, according to research firms IDC and Forrester Research Inc.

Offshore providers have gotten more competitive as they strengthen their onshore presence, develop relationships higher up in the food chain within customer organizations, utilize new technologies and invest in developing hosting infrastructures, according to results of a study released Tuesday by IDC. Meanwhile, a study this month by Forrester Research Inc. says major global service providers continue to lose ground to large Indian firms, especially in the application services market.

IDC stresses that offshore vendors are aggressively pursuing outsourcing deals that go beyond application maintenance engagements.

The Framingham company predicts that offshore IT services vendors will capture US$29.4 billion in worldwide customer spending by 2010, with little sign of a market slowdown. In the year to March 31, India’s IT exports amounted to $13.3 billion, according to the National Association of Software and Service Companies in Delhi. That figure is mainly for services.

Indian firms will continue to grow, and not just because they are a lower-cost option, according to Forrester. These firms have made a fundamental and structural change in the relationship between service provider and client, said the Cambridge, Massachusetts, company. Offshore providers have taught clients to expect transparency, efficiency and accountability in service delivery, Forrester said.

Indian outsourcers posted revenue and profits growth in the second quarter that were far higher than those of their multinational competitors, according to Forrester.

A number of multinational services companies, including IBM Corp. of Armonk, New York, and Electronic Data Systems Corp. of Plano, Texas, are expanding their services delivery in India both by acquisition and by setting up their own facilities.

Most global majors do not understand or properly execute the global delivery model, according to Forrester. The connection between local offices and offshore low-cost delivery centers is anything but seamless. Rather, these relationships often take the form of the local vendor team subcontracting to the teams in India, according to Forrester. This tends to make projects more expensive and less successful. Flying a client executive to Bangalore in first class once a month to babysit underperforming client projects is expensive and an indication that remote outsourcing is not working for the customer, Forrester said.

However, some multinational companies are competing with Indian outsourcing companies on price, taking advantage of their lower-cost delivery centers in India, according to sourcing consultancy firm Technology Partners International Inc. (TPI) in Houston. Some of the multinational companies are even bidding on smaller projects that they did not earlier address, said Siddharth Pai, a partner at TPI.

Some of the bids by multinational companies may be entry pricing — pricing low to get headway into a new customer, or to retain a shaky customer — Pai said. But Indian companies do not have the flexibility to price any lower because expectations from investors of revenue and profit growth for Indian companies are far higher than for multinational companies, he added.

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