Indian software companies grab market from global rivals

The total value of outsourcing contracts awarded in 2010 may have shrunk compared with 2009, but Indian information technology (IT) firms are gaining market share from global rivals, according to analysts tracking large global deals.

The total value of new contracts awarded slipped 11% during the year, according to TPI Index, compiled by TPI, the world’s largest sourcing data and advisory firm.

The index takes into account only deals worth a minimum total contract value of $25 million or more.

Business process outsourcing (BPO) deals, which made up for around 22% of the total publicly disclosed deals tracked by TPI
in 2010, fell 31% for the full year to $17.8 billion.

In the last three months, only $2.8 billion worth of BPO deals were awarded, down 63% from the same period a year ago.
Outsourcing, Indian IT’s mainstay, did better with only a 4% decline for the full year. Deals worth $61.2 billion were awarded in the year.

However, large corporations in developed markets like North America and Europe are increasingly re-negotiating or restructuring existing IT contracts, giving Indian firms such as Tata Consultancy Services (TCS) and Infosys Technologies a better chance to compete against their global rivals such as International Business Machines (IBM), Computer Science Corporation and Accenture.

“For 2010, one-third of the market was restructuring related, an all-time-high for any year in the decade,” noted, the latest TPI Index, which analysed global IT deal flow during the fourth quarter ended December 31, 2010. “We expect 2011 to again be a year with significant restructuring activity.”

“2010 saw Indian firms beginning to gain share in large contracts where they are one among many vendors,” said Sid Pai managing director at the Indian arm of TPI. “There is much more headroom for Indian vendors to grow their market share and 2011 will see that trend playing out more and more.”

In the fourth quarter alone, nearly $6.3 billion worth of restructured outsourcing contracts were awarded.

That compares with about $82billion worth of total IT outsourcing contracts awarded by corporations in North America, Europe, Middle East and Africa during 2010 calendar year.

Big ticket outsourcing deals signed 4-5 years ago were typically multi-hundred million dollar deals awarded to just one supplier, like IBM or Computer Science Corporation. Those contracts are now coming up for re-negotiation and clients are increasingly
preferring a multi-vendor approach, rather than having a
single vendor.

The number of single-vendor companies has dropped steadily from around 38% ten years ago to 24%, according to TPI data.
Simultaneously, the number of smaller deals (size less than $50 million) increased from 65 to 305 during the same period while billion-dollar deals fell from 24 to 14 during the decade.  

Indian software cos grab market from global rivals
“As they have grown disillusioned with single-source arrangements, global organisations are increasingly opting to employ multi-sourcing strategies,” said John Keppel, partner and president-information services & chief marketing officer at TPI.

“We expect the preference of companies to multi-source will continue to grow as it allows them to tap the best talent possible for their needs,” he said.

 “During earlier waves of outsourcing, Indian service providers were not the first priority for large corporations looking to outsource but increasingly we are seeing Indian firms as a class of vendors being included the first list of potential vendors being considered,” Pai said.

During the last few quarters, some of the larger Indian IT firms such as Cognizant and TCS have been surprising the street by beating their expectations by a wide margin.

In September quarter, for instance, TCS grew its revenues in dollar terms by a whopping 12% over the preceding quarter, while Infosys recorded a sequential growth of nearly 10% — rates that stand out even in pre-recession times.

“Deal restructuring remains dominant, resulting in continued market share gains for Indian vendors,” said Yogesh Aggarwal, analyst with HSBC Securities and Capital Markets, in a January 21 note.

“The addressable market for the Indian IT companies has grown exponentially as clients adopt multi-sourcing strategies and refrain from awarding mega-deals (over $1 billion) to a single vendor.”

Another good news for the Indian firms is that a lot of the restructuring is happening in integrated applications and infrastructure deals, where companies such as TCS and HCL Technologies have a strong presence and therefore stand a chance to gain a larger share of the outsourcing spend from markets such as North American and Europe.