Competition of Enterprises in the IT Outsourcing Services in India

Competition of Enterprises in the IT outsourcing services in India

Introduction

India is popularly perceived as the synonym of IT outsourcing industry. Ever since the rise of off shoring India enjoyed a predominant position in the market. Offshore outsourcing is an umbrella term that involves a variety of IT and business services offered to companies in developed countries by the firms based in developing countries like India, Philippines, and China etc.  While India still contributes 38% of the global market share of IT outsourcing industry, there is competition from other countries that has already eroded the future of IT outsourcing in the country (NASSCOM, 2017). Apart from that, there is large number of IT outsourcing enterprises within the country in which firms bloom and perish in a highly uncertain manner as a result of the tight domestic completion among firms to get overseas clients. The increasing opportunities in IT sector has led to emergence of IT based start ups in the country and as of now India ranks third in terms of IT outsourcing backing start up eco systems across the world.

Against this context, this paper tries to examine the competition within the IT outsourcing sector in the country and critically analyses the major factors that necessitates competition and the strategies that are used by the individual enterprises to address the competition from rival firms. The paper also provides a road map for getting competitive edge the market.

An Overview

Competition among IT Outsourcing Enterprises in India: 

Over the years, India has established itself as one of the most attractive destinations for IT outsourcing.  The offshore industry in India initially emerged as a software development market. But now it has diversified into many sectors and services including a wide range of activities ranging from call centres to data analytics (Roy et al., 2016).

Outsourcing can be defined as the transfer of an organization’s entire noncore but critical business process/function to an external vendor who uses IT based service delivery (Roy et al., 2016). Through outsourcing, the company can focus on its core business capabilities.  Outsourcing the non-core business functions to experts within another country also helps the company to ensure better outcome without spending too much on it. This off shoring of selected business functions not only reduces operational costs but also enhances the quality of services as it is managed by experts (Roy et al., 2016). Indian IT outsourcing industry mainly includes IT services, Business Process Outsourcing, Software Products and engineering services and Hardware services.  The following table reflects the market share of each sector.

Competition of Enterprises in the IT outsourcing services in India
Competition of Enterprises in the IT outsourcing services in India

Market share of major outsourcing Verticals (In Billion USD)

Sectors Market Share
IT Services 80.08 billion USD
Software development 29.26 billion USD
BPO 29.26 billion USD
Hardware 14 billion USD
  1. 0.1 Market share of outsourcing

From the table, it is evident that a large part of the outsourcing business is still occupied by IT services as it constitutes 80.08 billion USD in the year 2017. This is followed by BPOs and software development where as hardware is the least preferred segment.  In terms of revenue IT services contributed 52 % revenue of the total outsourcing income where as both BPO and software development process contributed 19%. Hardware had contributed only 9% of the total revenue in the year 2017 (IBEF, 2018).

Amidst stiff competition from other markets, outsourcing is thriving in India. The current revenue from IT outsourcing industry is 154 billion USD. Recent estimates show that approximately USD 1 trillion will be offered by international firms for global market analytics, clouds and other emerging technologies. Industry optimists expect a threefold increase in annual current revenue by 2025 to make it USD 350 billion (Sachidanand, 2017). However, with the rapid expansion of the domestic market, there is mushrooming of IT enterprises in the country that create a highly competitive domestic environment in India. There is stiff competition between companies to attract the international buyers. The competitive edge is attained through emphasis on higher productivity, innovation, value additions, good customer relationships, effective communication, domain expertise and agility (Laha, 2017). It is understood that focusing on traditional technologies lie Java, net and mainframe cannot bring the new age consumers from Europe and the USA.   Hence, competitive edge is gained through adoption of new technologies and hiring of efficient engineers to work on artificial intelligence, big data and robotics (Laha, 2017).  IT companies face extreme pressure in terms of cost and productivity.

There is high volatility in the IT outsourcing industry which triggers high competition among the players. Apart from the competition from other countries including China and Philippines, there is domestic competition among established companies as well as the start-ups to increase their outsourcing revenue. To address these shifting demands, enterprises in India always try to update their capabilities to accommodate the demands of the client. To understand the competition between the Indian IT companies it is interesting to note the annual revenue trend of pioneer companies in 2010 and 2016.

From the above figure it is evident that there is substantial decrease in the revenue of larger IT outsourcing companies in India since 2011. While the decline in revenue is 9.6 % in the case of TCS, it is only 3.79 % in the case of Infosys. Similarly, in the case of the third largest company, Wipro, it is 5.18 %. The revenue decline is extreme in the case of HCL technologies as there is 45.2 % decrease in the annual revenue since 2010 that makes the company’s revenue growth – 15.6 %. While all the leading companies reflect huge lose in revenue, it is relatively high in the case of HCL and TCS. Naturally both companies witnessed high rate of attrition during this period (IBEF, 2018).

However, it is interesting to note that, during the same period, the total revenue from IT outsourcing in the country increased substantially. While the overall revenue from IT- outsourcing was USD 74 billion in 2010, it became USD 154 billion in the year 2017. This is 3 to 5 percent higher than the annual IT sector growth across the world (IBEF, 2018). Apart from that India now enjoys 38 % of the total outsourcing market.

Yet, from the above figure (Figure 1) it is evident that the revenue growth of the key players is decreasing. This shows the emergence of new players in the markets and decline of IT sector monopoly that was earlier focused on a handful of big giants. The emerging enterprises attracted global companies through their focus on enterprise servicing to enterprise solutions (IBEF, 2018). There are around 4750 start-ups in the country which cater to the emerging needs of the global companies now.

The following table shows an overview of IT outsourcing enterprises in India.

Table 2

Key players in IT Outsourcing Industry

Category No. Of players % of total export revenue % of total employees Work focus
Large 11 47-50% 35 to 38% Fully integrated players with all services. Large scale operations and infrastructure
Medium 120-150 32-35% 28-30% Mid tier firms offer services in multiple verticals
Emerging 1000-1200 9-10% 15-20% Players offering niche services
Small 15,000 9-10% 15-18% Small players focusing on multiple niches

 2 Overview of major players

The table shows that although monopoly in the Indian outsourcing industry is slowly declining due to the entry of new firms, the 11 major players still contributes almost 50% of the total revenue as these companies enjoy higher brand value and diversified business. Small players that provide multiple services still struggle with 9 to 10 % of overall revenue where as the emerging companies and start-ups have initiated impressive performance.

What is the key niche area that helped the companies to grow in the recent period? While looking at the success of many firms it is evident that outsourcing firms that focus on the development of financial service related technology and software have better prospects after the global economic recession (Hussain, 2015). After the global financial crisis, there have been many regulatory measures, cost cutting efforts and technological innovation in the financial sector in order to modernise and streamline their operations. Since many of these technological modernisations were out of their traditional functionalities, there was a huge rise in outsourcing since 2010. This has helped the Indian firms that has core competency in financial service related IT technology. The latest data states that outsourcing accounts for 18 % of the total IT spending of the American banking industry after recession. In the case of insurance industry it is 20% (Hussain, 2015).  In the case of Indian firms, enterprises that has proven competency in supplying the innovative technology for banking services leveraged this competitive edge.

Indian firms that provide high end premium quality services to the global clients always get preferences in the industry. The quality of the services also encourages the overseas customers to strengthen their relationship with the Indian partner through mergers, acquisitions or joint venture firms (Bunyaratavej et al., 2011).

Figure 3

Competitive Edge of Indian outsourcing firms

Since many IT firms compete for a single project, customers tend to select the firm on the basis of the competitive advantage. Although, there are many new companies emerging in this market, the outsourcing landscape is still dominated by the large players who still enjoy 47 to 50 % of the market share. Hence, although it is easy for the small firms to enter into the marker considering the low level of capital required, it is difficult to survive unless they focus on innovative customer solutions within a short span of time (Javalgi, 2013).

Another problem that increases competition is the relatively less chances of product differentiation as most of the firms offer similar services. Large companies with global brand equity and wide variety of capabilities still outweigh the medium and small players in the market through their excellent infrastructure, system integration and consulting services (Kumar & Jhala, 2018).

Key Strategies to gain Competitive Edge in the Market

How do the key market players survive in the highly competitive internal market? What are their strategies? Some of the key strategies used by both large and medium players include the following:

  1. Enhanced focus on mobility, social computing, analytics and cloud which are in high demand in the global outsourcing landscape.
  2. Offering big data services that can provide the clients future milestones as well
  3. Enhanced investment in research and development, staff capacity building and training in order to increase productivity and quality
  4. Accelerated pace on innovation and adoption of latest technology in accordance with the changing demands of the global customers.
  5. Shifting the location to smaller cities in order to reduce operational cost and hence increase profit.
  6. Exploring business opportunities in other markets such as Latin America, East Europe and Africa because there is high competition to attract the attention of the American and European clients
  7. Since most of the companies offer similar products, competitive edge I attained through building brand value and brand image through investing in corporate social responsibility
  8. Indian medium and low level companies have also began to make competitive pricing strategies to meet the pressure from other firms in the market
  9. Enhancing staff capacity through special trainings that are conducted in association with leading institutes of the country
  10. Merging and acquisition are one of the tools to decrease competition and enhance productivity. For example, Accenture acquired Solutions IQ and Cognizant acquired Healthcare Service Corporation.

Apart from these general determinants, many evidences highlight some specific features that are intrinsically linked to IT firm success in India to attract foreign clients.

Stiff competition and pressure to maintain the existing clients force the companies to focus on innovative business models that can attract the overseas customers. Even the leading companies like TCS shifted their business model towards software platforms and chased digital contracts (Sachidanand, 2017).

The global firms are risk averse and they would prefer to work with the companies with whom they have good experience in the past. Hence, customer care and trust building is the key to success in a competitive market (Roy et al., 2016).

Capability building and regular upgrading of services are the key determinants of the survival of IT outsourcing firms in India.  Capability building involves both external and internal capability through capacity building, mergers and acquisitions, hiring highly efficient workforce etc (Sachidanand, 2017).

Exploring new avenues of business and continuous search for new markets can indeed contribute to doing business in a niche areas and locations. Recently, many firms including the start-ups have initiated the process of expanding their business to Latin America and East Europe which are unconventional IT markets. But this has helped them to overcome the stiff competition among firms in the domestic markets. While premium clients in the US and Western Europe still prefer to work with large scale IT giants with global brand value, the new clients from less developed countries are willing to work with smaller firms that offer competitive price (Jain, 2017).

To enjoy competitive edge in the market, the IT outsourcing enterprises in India must understand the fundamental determinants of business process outsourcing. The multinational companies outsource their functions to India mainly because of the low cost structure, scale, highly talented human capital, flexibility and faster penetration of technology. Since all the enterprises can offer the services in the same manner, competitive edge can be attained only through offering a significantly high quality service from the other firms. This move towards differentiation can indeed help the individual firms to leverage the IT boom. This differentiation may include consistency, timely delivery and guaranteed outcome.  To provide such cutting edge service to the selected clients firms need to be selective in terms of the use of technology, industry verticals and the experts their chose. More specifically, a firm working on health care services should focus on building innovative technique in the specific field and offer highly differentiated services to the particular health care services clients rather than applying for all the offshore opportunities (Jain, 2017). Providing strategic niche in a selected area can provide competitive edge because firms offering piece- meal projects can move towards high value solutions and ensure edge in the market. For example, Infosys offer a high end solution called ‘Finacle’ for core banking, mobile banking and e-banking needs of banking sector companies across the world (Javalgi, 2013).

Understanding the emerging trends in global outsourcing industry and adopting the technical skills to accommodate these demands are critical to the success of firms in the domestic market. Many IT outsourcing companies in the country including major players like HCL technologies failed to accommodate these emerging trends and hence it has affected their overall business in a bog way. The companies that emphasised on latest technology solutions including cloud computing, social media, automation and robotics earned high profits because many global firms are keen to update their technology using these mechanisms (NASSCOM, 2017). The start up firms that provide Robotics Process Automation (RPA) also gained momentum in the recent past. Since RPA has tremendous influence on speed, efficiency and cost savings many global companies have invested heavily in it. Thus, excellence in RPA services will be the key success factor in the outsourcing industry that can determine the growth and decline of a firm in India (Outsourceindia, 2018). The major players in the country have already included the robotics process automation in their offshore service portfolio.

Establishing strategic partnership with clients is an ideal step to moving up in the supply chain. Firms should try to avoid over dependence on a single client or handful of clients. Depending upon sole customers may lead to disproportionate demands from clients and will result in customer- firm power balance that is favourable towards the client. Hence, firms should focus on shifting towards higher end services and exploring new customers so that they can strengthen their bargaining power (Javalgi, 2013).

Creation of overseas branches and direct marketing in the overseas destination through their presence is a better alternative to overcome the competition. This helps the overseas companies to reduce the expenses for searching the ideal firm they are looking for off shoring their business. By opening branches in every potential markets, companies can provide local contract point. The local presence also helps building trust among the clients (Miller, 2002).

Joint venture with overseas companies is another strategic move often used by Indian companies to get competitive edge in the market. The joint ventures allow them to take advantage of the brand equity and reputation of the overseas partner. Similarly, the overseas partner can enjoy higher productivity at reduced expenditure (Miller, 2002).

Changing the traditional perspective towards a global agile business model is indeed a necessity considering the volatility in the domestic as well as international market. While taking the case of unsuccessful enterprises in India, it is evident that the reasons for failure include the following factors (Kumar & Jhala, 2018):

  1. Lack of capacity to scale up activities as per consumer demands
  2. Inability to penetrate new markets and geographies and lack of aggressive marketing
  3. Inability to introduce new and innovative products in tune with the demands of the agile customer
  4. Lower level of human capital and inability to control operational cost
  5. Declining brand positioning and performance
  6. Immature decision making in terms of selecting customers and key verticals

Based on the study of a handful of successful and unsuccessful firms in the industry, NASSCOM has identified the critical factors for competitive edge as shown below (Kumar & Jhala, 2018):

  1. Focus on data driven decision making and use of multiple technologies
  2. Limitless personalisation across channels
  3. Automated and consistent experience with global relevance
  4. Diverse revenue streams and multiple clients
  5. Cloud based delivery models
  6. Flexible pay terms
  7. Injecting innovation in every aspect of the company
  8. Making a clear and agile business model, fully understanding the market and competitors
  9. Prioritizing strategic capabilities through building on existing inventories and technology
  10. Identify and define the future path towards scalability
  11. Transparency, ethics and higher level of customer care to build trust and confidence among the investors
  12. Leveraging resources efficiently and investing funds in the capabilities that create differentiation.

Conclusion  

It was in 2012 that the global consulting firm KPMG predicted the death of Indian outsourcing industry. Following this, in the year 2013, The Economist reported that India is no longer the most favoured destination for IT (Jain, 2017). There are many automatic choices for international firms to chose for their off shore operations and India is only among the many countries. The report also argued that by 2022, the offshore industry in India will face complete decline (Jain, 2017).

Nevertheless, the present trend doesn’t support these claims. Outsourcing industry is growing in the country amidst the pessimistic comments and it still contributes 38 % of the total volume of outsourcing market. But, the problem does exist, not at the macro level, but at the micro level in which individual firms are making herculean attempts to attract the clients. The accelerating competition among diverse firms and the limited number of international clients make the IT outsourcing spectrum a highly volatile and unpredictable sector. The firms that continuously invest in product improvement, innovation and up-gradation of capabilities can indeed survive the competition. Hence, each firm needs to offer their services in line with the emerging technologies and market transformations.

To sum up we can conclude that the firms that can build innovative business models through the in-depth understanding of the entire business landscape, market dynamics, changing client requirements and the nature of competition in the industry can indeed make competitive edge in the IT outsourcing sector in India.

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