Medium-size Indian outsourcers will continue to play an important role in the IT services market, despite the fast growth of large Indian outsourcers such as Tata Consultancy Services, Infosys Technologies and Wipro, according to Everest Group research firm.
But they will have to specialize by focusing either on an industry vertical, or a few services, or a specific geography as a market, Everest said in a report released on Thursday.
For example -- MindTree, a mid-size outsourcer in Bangalore -- gets 46 percent of its revenue from outsourced product engineering services, while Microland, another mid-size company in Bangalore, is focused on remote infrastructure management. Headstrong is focused on services for the capital markets industry, while Sonata Software in Bangalore addresses mainly the travel industry and product engineering.
Choosing a specialization around a vertical market can however be tricky, as market opportunities can change very quickly or get commoditized, said Siddharth Pai, a partner at TPI, a sourcing data and advisory firm.
Mid-size companies have to either have the capability to make the shift quickly to new vertical markets or focus on technologies and intellectual property that can be used to address a variety of markets, he added.
There are good opportunities for mid-size outsourcers in that a large number of small and medium-size customers are looking to outsource to India to cut costs after the recession, said Jimit Arora, research director at Everest, on Friday.
One advantage medium-size companies offer small and mid-size customers is the focus and attention that they may not get from large outsourcers, Everest said. Customers can for example have access to the top management at a medium-size outsourcer, which they won't get if they are dealing with a tier-I outsourcer, Arora said.
But the market is getting competitive as some of the large Indian outsourcers are also targeting this business, Arora said.
Medium-size providers are better able to compete as they have relatively lower corporate overheads, relatively lower margins and are usually more agile in making decisions compared to the larger providers, Arora said.
India's US$27 billion offshore IT services business accounts for about 50 percent of the global offshore IT services industry, and the country remains the single largest location for offshore delivery of IT application development and maintenance (ADM) and remote infrastructure management (RIM) services, according to Everest.
The offshoring business in India is dominated by the Indian services operations of large multinational IT companies like HP, IBM and Accenture, and by large Indian outsourcers, each with annual revenue above $1 billion.
However, over 20 mid-size service providers with annual revenue in the range of $100 million to $1 billion still account for about 30 percent of the business, according to Everest. Smaller players with less than $100 million in annual revenues account for another 10 to 15 percent of India's offshoring revenue.
There are problems ahead however for mid-size outsourcers, according to Everest. Smaller providers are losing out as large customers consolidate the number of service providers they use.
As competition heats up from the larger players, some mid-size providers may lose out because they do not have the "mindshare" or recognition of global customers, Arora said. Mid-size players also get often talked about as targets for acquisitions, which may drive away potential customers, he added.
The problem is particularly acute for "generalist" companies that have attempted to clone large service providers in their service lines and strategies. They are likely to struggle or get acquired, Arora said. Some of them are dependent for most of their business on a few customers, which is a high risk, he added.
The generalist player is competing mainly on price with the larger players, and this is not a sustainable model in the long term, Pai said. Even if such a business is acquired, it will not be at high valuations because the large companies can instead expand organically, he added.
Mid-size IT service providers are however likely to remain relevant and continue to play an important and meaningful role in the future, according to Everest. But first they have to specialize and differentiate, Arora said.
Generalist or sub-scale providers need to re-evaluate their portfolios and select core offerings and focus segments that will drive differentiation in the broader marketplace, he added.