Indian Tier 1 service providers such as TCS, Infosys and Wipro have achieved tremendous growth and position in the IT service market over the last two decades. Competition from the next tier, however, is now heating up.
Ever so often, especially when reports of cost escalations in India surface (as they did recently with Apple’s decision to back away from their plans to grow their presence in India), the talk turns to its impact on — and the consequent demise of — the Tier 2 providers.
Why? Because there is a misguided assumption that at lower rungs of the offshore ladder, providers are playing for cut-rate applications maintenance work, and the “big boys” get all the large deals, unsolicited, and have top talent lining up to work.
No one makes this assumption more than the employees of the Tier 2 firms themselves.
We disagree. The Tier 2 offshore IT service providers have a lot going for them, beyond their ability to provide lower labor rates. We took a look at the sixth to tenth postions on Nasscom’s list of Indian service providers — Patni, I-flex*, Tech Mahindra, Perot Systems and L&T Infotech — to see how they were doing, and this is what we found: (*We did not look closely at I-flex, given Oracle’s acquisition of the firm and their significant revenue base from software products as opposed to IT services.)
Market conditions. The median deal sizes are getting smaller (a trend likely to continue into the near future), and enterprises are beginning to approach service firms for specialized skills.
Strategy and organization. Each provider is making significant investments in re-organizing and improving both its front-end and back-end operations. This includes processes for smarter execution of the global delivery model, better service portfolio management, as well as, greater brand awareness Human resources. Many have highly experienced management resources, who, even if they’re more expensive than engineers fresh out of school, provide a higher level of competency to the enterprises.
Size and scalability. Each provider has clearly hit the critical revenue mass, where it can be considered a viable provider for significantly sized applications-service deals.
Customer focus. Tier 2 providers are more agile, flexible and adaptable to different client environments, and give enterprises a greater level of control over their offshore initiative.
The Tier 1 offshore firms are getting too big, with the top five reaching revenues above a billion dollars each. To sustain growth, they need to chase large ($50 million and above) deals, where the stakes get higher and enterprises gravitate to a safe list of providers. This is why the large deals still overwhelmingly go to the likes of IBM, EDS, ACS, Capgemini and ACN. This leaves the smaller deals (e.g., below $20 million) for sharp and hungry Tier 2 firms.
Obviously, the continued growth of Tier 2 providers doesn’t mean that the rising tide will lift all boats. There are many holes that need to be plugged for these companies to afloat, and we expect to see more mergers and acquistions (like I-flex’s acquisition by Orcale and MphasiS’ acquisition by EDS).
Our advice to the Tier 2 service providers would be to focus on better managing the sales processes and aligning it with the client’s sourcing process in order to begin closing more deals. Organizational changes and mature marketing capabilities are sure to increase deal flow. To close these deals, Tier 2 providers will have to get better at structuring deals, especially in multiprovider environments, and work with sourcing consultants who may be involved in influencing deals and managing the RFP process.
The authors are co-founders and principals of Conscient Partners, a firm founded in 2004 to develop and execute go-to-market strategies for offshore service providers.
