The double-digit growth rates of Indian IT service providers have long been the envy of their Western counterparts. But as the offshore outsourcing market matures, India's outsourcers will have to move beyond the lower level IT work that got them where they are today.
Indian IT service providers grew at a combined annual growth rate (CAGR) of 32 percent between 2005 and 2008 compared to just 7 percent for Western outsourcers, according to outsourcing consultancy and research firm Information Services Group (ISG).
In the last three years, growth has slowed. Between 2009 and 2012, Western providers delivered just a 0.4 percent CAGR while Indian outsourcers fell to 16 percent, according to ISG.
[Related: 9 IT Outsourcing Trends to Watch in 2013]
"[Indian provider] growth is now slowing since they have begun to reach high levels of market penetration," says Sid Pai, partner and president for ISG Asia Pacific, says, "so the onus on them is to find ways to continue progressing by expanding into solutions and industry-focused software products."
While Indian companies continue to outperform their Western equivalents, a sluggish IT outsourcing market overall could start take its toll one some India providers this year.
"[That will] drive down margins further as competition gets even more intense," says Phil Fersht, president of IT outsourcing analyst firm HfS Research, which is predicting a slight 3.5 percent growth in IT services deals in 2013. "We may even see one [Indian provider] post negative growth in this slowing market."
"Ongoing margin pressure and an increasingly competitive environment will make it difficult to maintain even those reduced growth rates," says John Keppel, partner and president for ISG North Europe. "For India-heritage providers, changes in strategy -- some subtle and some not so subtle -- are required."
Firms that continue to focus on transactional low-end, low cost work may miss out on the next wave of IT services investment. "The market trend towards smaller deals and multi-sourcing is moving some business away from commodity offshore-based models, towards niche players as well as onshore-based models," says Rakesh Bhatia, senior associate of outsourcing consultancy Pace Harmon.
"It's time for these providers to make the necessary investments to continue their growth journey," says Fersht, "or they can start to look at some rather interesting case studies of providers in the Western world who failed to keep up with the times."
Indian IT outsouring service providers should take this six steps to ensure continued growth:
1. Hire IT Expertise Abroad
Indian firms need to up their consulting and domain specific expertise, says Atul Vashistha, CEO of offshoring consultancy Neo Advisory. And they'll have to look outside India for that.
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