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Outsourcing to India: Smaller firms good bet

As the top-tier Indian outsourcing companies continue their march to maturity, smaller clients should consider -- with all due care -- midtier providers, Forrester Research says.

Unless you are spending $20 million or more a year on outsourcing to India, you might be better off bypassing heavy hitters like Infosys Technologies Ltd., Tata Consultancy Services Ltd. (TCS) and Wipro Ltd. and seeking out smaller providers.

The prodigious growth that has turned the top Indian outsourcing companies into competitors for players like Accenture Ltd. and IBM also "has eroded some of the key benefits these providers used to deliver, primarily flexibility and client responsiveness, " according to Cambridge, Mass.-based Forrester Research Inc.

"Clients that want influence and flexibility in addition to quality and efficiency, without spending $100 million per year, are looking at the increasingly impressive array of midtier providers," analyst Stephanie Moore wrote in a July 10 report.

The missive is among a flurry of reports from Forrester and others that grapple with the current good news/bad news reality of offshoring to India: The maturation of the top Indian outsourcing companies comes with a price. As demand for their services outpaces supply, costs are rising, and some of the attributes that made these providers so attractive in the past -- personal attention and turning on a dime -- increasingly are in short supply for all but their most lucrative clients.

The cold shoulder

In order to keep pace with rapid growth, the major Indian providers have become more rigid about how they do business, Forrester contends. Providers that in the not-so-distant past were inclined to make employees work overtime to meet a customer deadline, increasingly are demanding that clients agree to pay overtime or decrease the scope of the project. Many providers have put the kibosh on allowing clients to interview staff or review staff résumés. Plus, as the demand for services outstrips employee supply, not only are wages going up but Indian providers are also finding it more difficult to add staff to a project on short notice, Moore observed.

"Unless they're spending a tremendous amount of money ($20 to $100 million per year), some clients do not have the influence they used to have with the top-tier providers," Moore wrote. "These providers are increasingly willing to walk away from business rather than make concessions or alterations that don't suit them."

Sometimes, even $20 million isn't enough. Moore related the experience of a prestigious financial services company that was spending approximately $22 million per year with a tier-one Indian provider. The financial services company, also a Forrester client, could not get phone calls returned to discuss terms as its contract was about to expire, in part because the original account manager had left.

"Clearly the providers are growing at such a rate that they can barely keep up with their most lucrative clients, never mind their second-tier clients," Moore concluded.

Don't tell that to Infosys, the Bangalore powerhouse that has grown from $500,000 to $3 billion in revenue in the past five years, employs 75,000 people and boasts a who's who of global companies as clients.

"Our focus has always been customer delight," said Srinivas Uppaluri, head of global marketing at Infosys.

Nor is that delight reserved for the $100 million customers, Uppaluri stressed, not when 473 of the 509 active Infosys clients of the past three months pay annual service fees of $15 million or less. Moreover, more than 90% of Infosys customers represent repeat business, he added. That doesn't happen if you're not returning phone calls or lack the personnel to meet customer demands. If there is any area where Infosys is inflexible, Uppaluri said, "it tends to be around demands that are tactical."

"If a company calls and says, 'Give me five people and we'll manage the rest,' we would say no. We want to own the outcome," he said.

He also defended his company's ability to ramp up quickly, pointing to a well-oiled recruiting, training and infrastructure strategy designed to keep pace with customer needs. Most smaller companies don't have that capacity, he added.

Wipro and TCS did not respond to emails seeking comment.

Finding an alternative to the Indian majors among the more than 500 smaller Indian providers out there requires serious due diligence, Forrester agreed. Indeed, a report in March by Forrester analyst Sudin Apte warned that the gulf between the performance of the largest providers -- Infosys, TCS and Wipro -- and the other outsourcing firms in India was widening, creating a "polarization" of the market. As the largest companies continue their phenomenal growth -- the top three will capture roughly 40% of the IT services revenue in 2007 -- many of the rest are "bleeding and vulnerable," Apte wrote.

The situation is expected to worsen, as talent migrates to the bigger firms. "The small and medium-size Indian providers are being marginalized and crushed as the war between the top Indian providers … heats up," the report stated. Therefore, clients must choose their providers carefully, Apte warned, and even "plan for the probability of their current offshore provider going out of business or being acquired."

Let us know what you think about the story; email Linda Tucci, Senior News Writer.

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