Battling It Out: It's bad times for IT companies, especially smaller firms

Amid-sized retailer in the US was recently looking for a vendor to maintain a back-end computer application. The contract size was not large, just $40 million, spread over seven years. So, imagine its surprise when its request for proposal (RFP) got an overwhelming response. But the real surprise was aggressive wooing by one of India's largest IT companies, which in the past would have not given such a contract any attention. In fact, a senior vice president even spent time with the retailer's chief technology officer. Finally, the large Indian IT company priced itself in such a way that the smaller vendors had no chance of getting the deal.

This perfectly sums up what is going on in the Indian IT industry, where the struggle to grow and survive is making companies brush aside many of their old assumptions and calculations. Rajesh Gupta, India Partner at ISG, a global technology research and advisory firm, which acts as an intermediary between customers and IT services players, says he is not surprised at the price aggression being displayed by the larger players.

Sid Pai, an industry veteran and Managing Partner of Tekinroads, a research and advisory firm, is not too sanguine about the prospects of most smaller players. "It is relative exposure to newer technologies rather than size which will determine survival. A lot of companies are hiding behind the digital nomenclature. Most of them work on old technologies and have a factory worldview. Even some larger players suffer the same malaise, but given their resources, they may get more time to change course. The next four-six quarters will see the weeding out of the weaklings. Smaller players will face bigger challenges."

The MindTree CEO, however, says that resources are not a constraint even for the smaller players. "Capital is easily available today unlike in the past. Survival is more about strategy and execution."

Rajesh Gupta of ISG says some smaller players might focus on segments such as mainframe applications that are relatively harder to move to the cloud. While this may hit margins, some of them will survive. "But there are other threats such as talent flight. Who wants to be associated with companies working on yesterday's technology and that too, if they have little or no growth?"

After the first wave of consolidation where the likes of iGate, Mphasis, Geometric and Patni were acquired, the Indian IT sector seems to be ripe for its second wave of consolidation. Unless the smaller players focus on specialisation and build a moat with domain knowledge, they are in for more rough times.