Switching to Big League

It’s official now. India’s top IT companies are slowly but steadily inching their way into the big league. According IT research and advisory major Gartner, India’s top six leading IT services companies, TCS, Infosys, Satyam, Wipro, Cognizant, and HCL Technologies, accounted for 1.9 per cent of the total US$ 672 billion IT services market in 2006; this is as against 0.5 per cent of the $554 billion IT services market in 2001. That’s almost a four-fold growth.

If that is not enough, in 2006, India’s largest IT company TCS alone commanded a global market share of 0.6 per cent, which is more than what all the top six companies (Gartner calls them SWITCH after their first alphabets) held in 2001 (0.5 per cent). “The SWITCH companies have evolved from being totally unknown entities (yes, even as late as five years back they were still relatively unknown outside of their clients) to becoming reasonably known entities today within the IT industry globally. This means that they tend to be identified and earmarked to be on short-lists on deals that they might not have been considered for in the past,” says Partha Iyengar, VP & Regional Research Director, Gartner. Iyengar also feels that the ability of these firms to scale in terms of the size and complexity of projects has also gone up quite significantly (though still not within touching distance of the largest deals of the global biggies).

Here is another pointer to the rapid strides that these Indian players have made. In 2001, the ranking positions of the SWITCH companies spanned from 68 to 212. By 2006, they were in the top 100, with rank positions spanning from 35 to 86. However, they still have a long way to go. IBM, the global leader in IT services, has more than three times the market share (7.25 per cent) of all the SWITCH companies (1.9 per cent) put together.

With that kind of a start, can this band of six catch up with the IBMs and Capgeminis of the world without a big ticket acquisition? Iyengar believes that it can be done provided companies move aggressively up the value chain to higher profitability projects. “However, the bad news is that the SWITCH companies are not moving on this as quickly as they need to. If the business model adaptation does not happen, the only way they can reach the global top 10 will be by inorganic growth—and that too some ‘big ticket’ inorganic growth,” says Iyengar.

TCS is among the players who have made a few acquisitions, albeit smaller ones. Like TCS’ CFO S. Mahalingam says: “At the moment, the global majors are not growing at the pace that we are growing or are even close to our profitability levels. Currently, we are not looking at any acquisitions but if something interesting comes along, we might look at it.” That seems to make a lot of sense considering that the average annual growth rate of the SWITCH companies was 42.4 per cent in 2006, compared with a 4.3 per cent growth of the market leader during the same period.

Does that mean that Indian companies would have to sacrifice their comfortable profit margins to be truly counted in the big league? Yes, says Iyengar citing that these players have to increase their onsite footprint to acquire (costlier) onsite domain and business skills. “The gap between profitability currently is so high that they have a reasonable buffer in terms of time before the profitability numbers even come close. However, the downside of this is that it is actually viable and profitable (within their current profitability guidance) for let’s say an IBM or Accenture to take on domestic projects but harder for the Indian companies to do so. This is because there is a stark difference in profitability of the domestic projects versus offshore projects, and they could get hammered by Dalal Street for that,” says Iyengar. And these domestic projects are the ones that are likely to allow these players to ‘experiment’ and sharpen their skills in newer areas.