India-heritage service providers have been a significant force in the outsourcing market for at least 10 years. Between 2009 and 2012, they increased their market share by 13 percentage points as measured by annual contract value (ACV). In the same period, Western-heritage providers’ share declined some 7 percent.
But the growth of India-heritage providers has also been slowing. The compound annual growth rate of their annual revenues has gone from 32 percent in 2005-08 to 16 percent since then. It will be difficult to maintain even those lower growth rates, especially as accompanied by margin pressure in a very competitive environment.
So how can India-heritage providers keep growing?
• First, they need to win the U.S. restructuring market, which represents 35 percent of the country’s total ACV. They’ve already grabbed second- and third-generation deals but will need to capture even more to sustain growth. Incumbency isn’t what it used to be, and many restructurings are indeed shifting away from Western-heritage providers. But there’s a catch: As clients become more comfortable with switching providers and managing the associated costs, the business hard-won by the India-heritage providers will itself come under threat.
• A second, and less challenging, growth opportunity is BPO, in large part because the India-heritage providers have had less catching up to do. Their case studies and proof points are nearly as robust as those of their Western competition. Still, with their market share at just 36 percent, there is plenty of opportunity for expansion in what appears to be a bright segment of the outsourcing market right now. Still, sustained growth will require not just success, but dominance.
• Third, they will need to crack the Public Sector globally. Already, TCS, Infosys, HCL and Cognizant have won deals ranging from $15 million to more than $500 million. Protectionist behaviors are natural in this space and will continue to inhibit growth in market share, but workarounds exist. These are large, complex deals, and they are expensive to win, but they also are sticky and profitable.
• Fourth: Continental Europe. In the last three years, only 60 percent of the transactions ISG advised in the region had offshore scope. While that is nearly a 20 percent increase from the prior three-year period, it still leaves plenty of room for opportunity.
Long term, the best defense may be a good offense. Many Western service providers simply can’t maintain their historically high overheads and still remain competitive. But India-heritage service providers will need to look to some other growth engines to stay on their trajectory, such as the mid-market and emerging technologies. In the short term, we feel that the four points above hold the key to sustaining their double-digit pace.