Deals galore ahead of Indian offshoring

Of over 3,000 firms, only 50 may survive in five years

There are likely to be three to four acquisitions in the coming two quarters in the line of Daksh (acquired by IBM) and i-flex (acquired by Oracle), Vivek Pandit, a partner in McKinsey said while seeking to illustrate the consolidation he saw ahead of the Indian offshoring industry.

He went further and said that over next five years there would be a massive shakeout in the industry which was hugely fragmented with the top ten having only a 20 per cent market share. In an industry in which there were presently over 3,000 players, those now not in the top 50 would have to either grow into that league or sell out.

Pandit was outlining the likely evolution of the global offshoring industry which was part of the discussions marking the launch of the Nasscom McKinsey Report 2005, here on Friday.

The Indian industry leaders would face both a gigantic potential for growth and also intense global competition as countries like the Philippines, China, Ireland, those in Eastern Europe and Russia would be waking up to the global offshoring opportunity, of which India presently had a two thirds share.

India's global champions have to have a three-tier model - onsite, near shore and offshore - in order to deliver, and set up shop in some of the countries where the competing companies are located. The competition will be more among companies than nations, said Detlev Hoch, director of McKinsey in Germany.

The stakes are high and both the Indian leaders and the market have played a role in defining them. India's top IT companies have not only set themselves hugely ambitious tasks but will also have to maintain very high growth to deliver on the expectations implicit in the valuations given to them by the capital market.

Tier I players will have to grow at a compound annual rate of 30-40 per cent to reach the goal of $10 billion topline and joining the top ten IT companies in the world by 2010.

The story is still about costs but much more than factor costs that are driven by labour arbitrage. The process productivity of the customer has to be addressed with skills arbitrage and cost avoidance through leakage prevention and even offshore automation. The key to growth lies in revenue enhancement through service expansion through new service offerings.

To achieve all this it is necessary to understand the forces shaping the industry. Everyone is aware of the need for offshore adoption but the willingness to change is driven both by margin pressure (you need some pain to change) and perceived benefits.

To make offshoring work, the customer has to prepare his organisation. The vendor can play a role in this in its own interest as the main cause of failure is unpreparedness, explained Pandit.

The successful Indian players have to serve customers looking for long term partners to change their business models. The business transformation that the offshore vendor can help achieve for its client is well illustrated by the opportunities in the pharma industry. If pharma companies can offshore a lot of their drug discovery work and stage four clinical trials (post launch) in particular, which need steady monitoring of patients, then the pharma business can change.

Enormous gains have, for example, been made in the airline business by auditing small costs at lower costs. This has had the result of producing a 30 per cent rise in EBIT. When that happens, it marks a disruptive change in the business model and other existing players have to follow suit.