Caso, a managing director and senior analyst for IT and BPO, told the OutsourceWorld Conference in New York last week that the big four or five Indian players, along with IBM and Accenture, make up the short list of suppliers for general offshore work for Fortune 300 companies. And the niche players can also compete for certain parts of these big accounts, he said.
The problem is that the midsize offshorers have neither the scale of a TCS or Infosys, nor the specialization of the many smaller Indian firms with specific vertical experience or a narrow technical focus, Caso said. Once these niche guys grow, they can’t exist in-between very large and small. Their financials just won’t work out, he said.
In terms of future consolidation, Caso expects the most strategic acquisitions to deliver new offerings and clients, rather than sheer size. Several big US services companies have been slow to get in the offshore game, such as EDS Corp, which only recently began mounting a serious Indian challenge with its takeover of Mphasis earlier this year.
Expect these companies to buy small to mid-size Indian companies to boost their Indian back-ends and bring on new clients and vertical knowledge, Caso said. He also suggested that many of the small services teams were considering merging with one another to gain more specific expertise and expand client base, even if these deals are across different geographies.
Looking at the most recent M&A activity in the Indian market, the strategies are quite clear, said Rahul Bhasin, a managing partner at Baring Private Equity Partners in India. Of the total M&A value between January 2005 and April 2006, roughly 73% involved a buyer staying in the same geography and adding a new service, Bhasin said.
The remaining 27% includes companies expanding into new geographies with the same services, such as the EDS-Mphasis deal or the many deals in which the likes of TCS, Infosys and Wipro have bought US-and European-based outfits for a better Western front-end and more client-facing consultants.
There will probably be more and larger acquisitions from the major Indian firms down the road; together, TCS, Infosys and Wipro have some $4bn in cash on hand, Bhasin said. He also outlined some Indian investment trends in the private equity field. For one, there are a large number of private equity deals for platform providers in niche areas.
In addition to this, there is funding going to the hiving off of large companies’ captive offshore division. Captives for the most part turn out to underperform, and at higher costs, then their third-party offshore peers, Bhasin noted.
They generally hire inferior talent, have a difficult time controlling costs, and their workers skills get outdated since they don’t face the competition of the general offshore supplier pool, he said. Spinning them off into third-party providers can be a good investment and get their operations back in line, he added.
