IT Services Rise of Tier II companies

Date:   Friday , July 01, 2011

The Indian IT outsourcing industry is going through very exciting phase in its business life cycle. The industry is rising up to the challenge thrown at them by the dominant IT outsourcing vendors from U.S. and Europe. In doing so, the industry has had to be flexible, creative and smart in changing the rules of the game. The large IT outsourcing companies in India have been successful in leading the way. The next set of innovations in business models would come from the Tier II Outsourcing companies in India who are trying to break the billion dollar revenue barrier.

Each of the Tier II companies is trying to chart its’ own course to achieve this mark. Customers, investors, industry observers are eager to understand and participate in this endeavor undertaken by these companies. Thus, the future shape of the outsourcing industry in India would depend on how these strategies get executed and help them achieve their targets. As one of the leading Tier II companies, in India, Prithvi is contributing to the change in the industry by transformation itself.

Some of the few questions, I am frequently get asked during my interaction with stakeholders are:

How will Tier II companies reach their targets? What are the problems they face? Will they really succeed in reaching their targets? The answer lies in understanding the barriers that need to be broken to achieve this target.

Barriers to be Broken:
Success or failure of Tier II companies in reaching the billion dollar USD revenue mark would largely depend on their ability to address and overcome the fundamental structural barriers that exist in the market place. These barriers viz. Scale, Breadth of services, Industry coverage and geographic spread are the building blocks of any successful large IT Outsourcing company.

All the four elements feed into each other and are highly correlated. Ideally, a successful company would have to drive a balanced approach to growth through all the four elements. However, in reality companies have access to limited resources, which should be optimally deployed to achieve maximum possible ROI. Most companies struggle to answer the question “Where do they start?” It is a classic chicken and egg problem that lacks a clear answer or path to success.

‘Scale’ in IT outsourcing, is the ability of the companies to support contracts that have a large resource requirement (For example: More than 3000 people to be deployed). This cannot be achieved unless our execution capabilities in the offerings we provide are repeatable across various customers. One of the key aspects of achieving scale is to increase the revenue per customer.

Industry Coverage:
Industry knowledge and expertise is an important element in winning the trust and confidence of the customer. Tier- II companies have often stuck to a couple of industry and have tried to grow in them. This strategy is fraught with risk of excessive exposure to a few industries. Wider coverage of industries would enable them to diversify their portfolio and reduce the risk. Companies would have to invest in bringing industry experts into their fold and building industry centric offerings.

Breadth of Service Portfolio:
In the IT industry, technologies are introduced at a very rapid pace. Companies are often faced with a challenge of adding new service offerings that could help them meet the rapidly changing scenarios of technology usage.
However, it would not be possible for a company to provide all the services under its umbrella. Multiple factors, such as potential size of the market, cost of acquiring the skill, amount of deviation from its current service portfolio and more, influence the decision of adding a service offering. The breadth of service to portfolio must be wide enough to catch the big fish.

Geographic Coverage:
Customers always seek to engage with vendors who are locally situated. In this context, companies that have the most geographic spread tend to do well. Most of the Tier II companies have limited geographic reach with U.S. as a primary market. Adding more geography to their coverage area could help them seek opportunities that they hitherto would miss out on. Expanding geographic reach is an expensive affair, which not many Tier –II companies seem to be willing to take.

It requires a good balancing act to be able to move forward all the elements and achieve success. The Tier- II companies seem to taking multiple approaches, some of them are moving forward by picking up a single element, while some are taking a hybrid approach. Irrespective of the strategies, execution would play a key role in determining success of these efforts.

Building an Execution Mindset
Until the recession of 2008, most of the Tier II companies operated in cruise control mode, assuming that the growth to billion dollar USD revenue would be a natural and obvious progression, which can be achieved without transforming themselves.

The recession altered the plans and forced companies to look at their business in new light. However, it was not easy to move out of their comfort zone and re-cast the organization to be able to rise up and meet the challenge of the changing marketplace.

The Tier II companies are currently grappling to outline strategies to increase their top lines and bottom lines. It has been observed that most of the strategies typically limit themselves to paper and are not translated into execution driven actions.

To be able to re-cast the organization, companies have to concentrate on three area’s

1) Develop a clearly articulated Strategy that would be driven down the chain of command

2) Build and re-cast the organization that would drive the execution of the strategy.

3) Invest in change management to re-orient the organization towards the new goals and develop new mindset.

Before embarking on implementation of new strategy, the organization would have to transform and prime itself for the journey ahead. Execution mindset can only be inculcated through gradual transformation process. It cannot be abruptly force fed into the culture of the company.

Road Ahead
The Indian IT outsourcing industry is geared to meet these challenges. I am sure we will see many new innovative ideas taking shape. The next decade would be decade of Tier – II outsourcing companies in India. We at Prithvi are glad to be contributing to it.

The author is the CEO of Prithvi Information Solutions