Somewhere deep in the recesses of an Infotech park, the head of marketing of one of India's Tier I software services majors is burning midnight oil. Walk into his room, and chances are that he will be hunched over his laptop, sifting through billion-dollar numbers, Fortune 500 marques and sundry vertical industries ranging from retail to telecom to manufacturing. Walk into his room, and chances are also that he will bang his laptop shut in a paranoiac fit. Indeed this is top-secret, high-stakes stuff, which explains why this marketing head doesn't want to be named, or why he doesn't want the outside world to even know what he's working on.

The unnamed honcho has ample reason to be so guarded (and anonymous). He's working on a king-size opportunity that's up for grabs for the Indian it vendors. According to 2006 research by TPI, the world's largest sourcing advisory firm, close to $100 billion (Rs 4,50,000 crore) worth of big-ticket outsourcing contracts will come up for renewal in the next two years. He isn't telling which contracts he's eyeing or the verticals he's targeting, but, on persistent prodding, all he's willing to reveal is that over 50 per cent of these contracts will be renewed between July 2006 and December 2007 ("which gives me some time").

For the six-seven companies that comprise Tier I of the Indian it services sector, the iron may just be hot enough to strike. That's because the us Big Six of outsourcing-Accenture, ACS, CSC, EDs, HP and IBM-have never been under as much pressure as they're today, buffeted by high costs and an Indian global delivery model that's matured over the years. And with the Big Six being incumbent service providers on 72 per cent of the contract value to be renewed-according to TPI-Indian it could well be on its way to carve up a significant share of the global outsourcing pie.

"While we cannot predict how much of this $100 billion could come the way of the Indian vendors, it looks increasingly likely that the Big Six will not retain all of these contracts in full. Infosys, Satyam, Wipro, Tata Consultancy Services and HCL are beginning to win bigger deals with larger contract value and extended offerings," points out Duncan Aitchison, Managing Director, TPI. Adds Dominique Raviart, Senior Analyst with the UK-based telecom and software advisory firm Ovum Holdings: "India-based players are changing the rules of the market and we expect two to three of these firms to join the Ivy League of Outsourcers." Raviart explains that the Indian vendors are not just beginning to gain market share in the us, but also in Continental Europe, which is reflected in the two largest contracts ever bagged by TCS in Europe: Pearl in the UK ($840 million or Rs 3,780 crore) and ABN Amro in the Netherlands ($260 million or Rs 1,170 crore).

That's probably why S. Ramadorai, Managing Director & CEO, TCS-and also Chairman of the association for the software services industry-is beaming at the prospect of the exponential growth that's waiting to be tapped. "There's a huge upside and that's why we've been attempting to size up the potential addressable market for it exports, which should grow from $17.8 billion (Rs 80,100 crore) today to $60 billion (Rs 2,70,000 crore) by 2009-10," says Ramadorai. And remember that's only services exports. The $100-billion renewal figure includes it-enabled services, currently making up roughly half of the IT and ITEs sector. What's more, the $100 billion figure includes only large deals, and only those originating from the US. Europe, too, is where the action is. To narrow it down, India's strength lies in applications management, which is close to a third of the entire outsourcing pie. Just two of the mega contracts that come up for renewal by January 2007 are from DuPont ($4 billion or Rs 18,000 crore, with Accenture as the incumbent) and Monsanto ($2.5 billion, with IBM Global Services as the current vendor). No CEO's going on record, but rough and ready off-the-record projections indicate there's an addressable outsourcing market of close to $50 billion or Rs 2,25,000 crore (including new contracts as well as renewals) over the next two years. Industry estimates are that the manufacturing, telecom, and banking & financial services verticals will constitute a little over half of this opportunity, with governments and defence accounting for another 20 per cent. How much of that market Indian vendors are successful in capturing is of course a soothsayer's job, but as Frances Karamouzis, Research Director, Gartner Inc., points out: "Indian vendors are being invited to the dance in the applications space."

There's been ample evidence of that in recent times. In September 2005 when ABN Amro announced its mega $2.2-billion (Rs 9,900-crore) it outsourcing deal, it heralded the arrival of Indian players on the global stage. Big daddy IBM walked away with the lion's share, with 80 per cent or $ 1.8 billion (Rs 8,100 crore) of the deal, with TCS, Infosys and Patni also getting a foot in. They didn't get too much in terms of value (TCS got the largest piece, of $260 million or Rs 1,170 crore over five years), but as Deepak Khosla, Senior Vice President (Marketing), Patni, points out: "The size of the deal wasn't important. What is important is that we are getting a chance." Soon others from the top tier started getting invitations to the elite club, the latest being HCL Technologies' $335-million (Rs 1,507.5-crore) contract from European electrical retailer DSG International, and Wipro getting a piece of gm's it outsourcing cake. Says Girish Paranjpe, President (Finance Solutions), Wipro: "Indian Tier I players, including Wipro, have always worked for some of the best marquee clients. However, that increasingly in every single deal, whatever its size or complexity, Indian companies are being considered, just goes to show how far we have come."

	"We will continue to do $50-100 million deals, that's our bread and butter. But $0.5-1 billion contracts are clearly on the horizon" Hetzel W. Folden Senior VP (Strategic Deals Group), Satyam
	"The good news right now is not the value of the deals we are getting, but the unbundling of contracts that's begun to happen" Deepak Khosla Senior VP (Global Marketing), Patni

You can't disagree with Paranjpe. The Indian it services industry will earn $23.4 billion (Rs 1,05,300 crore) in export revenues this year. Just five years back it was a measly $6.2 billion (Rs 27,900 crore). The pace of growth has been stupendous. The industry has six players with revenues of a billion dollars, three companies with over 50,000 employees and three more with over 25,000. What's more, market caps of the Indian top tier have soared, and today aren't way off their Big Six counterparts (see The Big Six and The Indian Tier I). And their net margins are in handsome two-digit territory, at 20-25 per cent. EDs' net margins, on the other hand, are in a low, single-digit range. Says B. Ramalinga Raju, Founder & Chairman, Satyam Computer Services: "If you rank the top 15-20 global it services companies by market cap, you will find 50 per cent of them being Indian companies. The measure is not revenues any longer, which arise out of higher costs. Therefore, it is no longer debatable whether Indian companies have arrived or not."

Along with size and scale, there are a few other significant factors working in favour of Indian vendors. Till recently customers were content outsourcing to a single large vendor with a 'one-throat-to-choke' principle to ensure accountability. For instance, in 2003, there were 29 deals worth $1 billion (Rs 4,500 crore) or more. In 2004, this number came down to 22 and in 2005 it was just 17, as clients realised they weren't getting the expected benefits from single-party outsourcing. So, instead of being locked into one vendor, they're realising it pays to play one vendor against another to get the best possible price and service. R. Chandrasekaran, MD, Cognizant, says, "Customers' reliance on a single vendor to provide end-to-end services is diminishing and they are unbundling their requirements and partnering with multiple players in specific areas of their strength."

Lance Travis, an analyst with the Cambridge, Massachusetts-based AMR Research says: "Large Indian companies such as Infosys, Wipro and TCS will continue to eat into the market share of the traditional global firms such as IBM and Accenture. Rather than selecting an IBM because they can do it all, a customer will now select IBM for what they do best and an Indian firm for what they do best." Ramadorai sums it up succinctly when he says deals are getting "shorter, smaller and split".

	"With deals getting shorter, smaller and split, I see plenty of upside for Indian vendors. The addressable market could be $60 billion by 2009-10" S. Ramadorai CEO, Tata Consultancy Services
	"Global delivery model (GDM) allows us to grow rapidly, while at the same time maintain our margins. Offshore will always be key to our operations" T.V. Mohandas Pai CFO, Infosys Technologies

Best Of Breed Solutions

This emphasis on getting best of breed solutions has plenty to do with the maturing of India's global delivery model, and the faith global customers are showing in it. Indeed, few CIOs today dispute the cost advantages and the benefits of quality and process maturity that comes with Indian vendors. As Ram Mynampati, President (Commercial & Healthcare Business), Satyam, puts it: "The evolving trend is towards looking at best-of-breed partnership opportunities and creating few, strategic partnerships. When you look from that perspective, there is absolutely no difference between a large systems integrator and a Satyam. We compete with the Accentures, EDs' and IBMs, and we get our fair share of opportunities."

At the same time, by building a consulting end and domain competencies, largely via niche acquisitions, India's top tier has emerged as providers of an integrated suite of services. This, in turn, makes them more attractive to potential customers. As Satyam's Raju says: "For every unit of consulting we do, we expect 10 times more of other services to come in." Last year, Satyam made two high-end consulting acquisitions, Citisoft and Knowledge Dynamics. They're not the only ones. Wipro has been the most aggressive: In business process management it bought Spectramind, cMango in business services management, New Logic in wireless & tooth, and MPower for payment services. Geographical reach has also been a factor influencing M&As (mergers and acquisitions). Infosys, for instance, acquired Expert Information Systems, Australia, for a shade under $23 million (Rs 103.5 crore) to enhance its footprint. TCS recently acquired a Chilean BPO for language skills and a customer base. And in the last couple of years, Cognizant has made six 'small' acquisitions. Says T.V. Mohandas Pai, CFO, Infosys: "The ABN Amro deal required us to have a significant presence in the UK, while other clients may want us to have centres in Europe or North America. We have rapidly expanded our presence into countries such as the Czech Republic, the UK, the US and China. The LatAm market is promising and we are looking at a presence there as well."

	"For some companies, a full-scope, single-vendor outsourcing model delivers the best results" Amitabh Ray Director (Global Delivery), IBM India
	"In India, we have grown from 200 to 16,800 people in five years and taken our GDM to the next level" Chet Kamat Managing partner, Accenture India

So are all these initiatives going to translate into the ascent of the Indian vendor on the global stage, and the decline of its MNC competition? Of course not, says the rival camp. Chet Kamat, Managing Partner, Accenture India, says Indian players have to still go a long way before they approach the kind of leverage multinationals have with clients. "Yes, we see Indian players now in some of the larger deals where earlier only an Accenture or an IBM or an EDs were considered. But we see them in probably just around 2 per cent of these deals." It's easy to see the reason for Kamat's confidence. Accenture after all has some 2,500 clients, including 87 of the Fortune Global 100 and two thirds of the Fortune Global 500, with a footprint of 40 delivery centres across 30 countries in nearly 30 industry verticals.

Amitabh Ray, Director (Global Delivery), IBM India, sounds more cautious. For one, he doesn't think the selective, multi-vendor outsourcing model is here to stay across the board. "For some companies, a full-scope, single-vendor outsourcing model delivers the best results, and for others, a selective sourcing model may suit best. However, for a company to gain benefits from any outsourcing contract, it needs to link its it and business strategies, choose the most appropriate services to outsource, and adhere to a comprehensive governance model and measurement systems that focus on business objectives rather than service levels. This is where we feel IBM has an advantage."

	"The cost arbitrage MNCs are able to bring to an offshoring deal is very low compared to Indian IT services companies" Girish Paranjape President (Finance Solutions) and Chief Marketing Officer, Wipro
	"Customers' reliance on one vendor to provide end-to-end services is diminishing and they are partnering with multiple players" R. Chandrasekaran MD, Cognizant

Once you're able to digest all that, take a look at how the MNC bunch is attempting to ride on the low-cost offshore strategy that's been near-perfected by their Indian counterparts. Says Accenture's Kamat: "We have added 40,000 people in two years (by growing from 83,000 in August 2003 to 123,000 in August 2005). In India, we have grown from 200 to 16,800 people in five years...We have taken our global delivery model to the next level."

India is also a key part of IBM's global delivery strategy, which is reflected in the headcount numbers. In December 2004, Big Blue in India had a little over 23,000 employees. An year later, that figure had reached 38,500. "India is a crucial piece in IBM's strategy to operate as a globally integrated company. With year-on-year growth of 55 per cent in 2005, being home to IBM's most advanced software, services and research centres of excellence like India Software Lab and India Research Lab, IBM will continue to make strategic investments in the India marketplace," adds IBM's Ray. In 2005, IBM launched a first-of-its-kind Global Services Delivery Centre (GSDC) in Bangalore, investing $10 million in 2004-05 and significantly expanding its existing operations.

Size Matters

Whilst the trend may be evolving towards multi vendors and smaller deals, fact remains that the "smaller" contracts-in the $500 million-$1 billion range-are still large by Indian standards. And Indian vendors, who till date have rarely crossed the $200-million (Rs 900-crore) threshold, clearly have to start thinking big. "It is true that Indian companies, as of today, are not best placed to take on billion-dollar size deals. But there are quite a number of $0.5-1 billion (Rs 2,250-4,500 crore) contracts that we are actively pursuing," says Satyam's Raju. It's in this pursuit of mega pitches that Raju has hired Hetzel W. Folden as Senior Vice President (Strategic Deals Group). Folden was part of the strategic deals team at CSC, where he played a key role as Lead Negotiator in closing deals worth over $3 billion (Rs 13,500 crore) in recent years.

WHERE INDIAN VENDORS COULD TRIP UP

» Marketing spends are inadequate: Indian companies spend between 8 per cent and 14-15 per cent of revenues on sales and marketing. This is grossly inadequate » Infrastructure is abysmal. Imagine your techies on the road for three hours just to reach the office. Shabby airports, power outages and not enough land to build tech parks and campuses complete the dismal picture » The trend of unbundling contracts to multiple vendors is still evolving. If Indian vendors don't deliver, customers may go back to single-vendor, multi-process outsourcing » Indian vendors have to beef up on financial structuring of contracts. CIOs may be willing to go with Indian service providers, but CFOs need to be convinced » Labour costs are rising and the labour pool isn't too deep. Companies chasing the same talent pool are driving up costs for everybody. At the same time, competition from other low-cost destinations is intensifying

Can the Indian it services sector seize the days ahead? The opportunity may be huge, the capabilities may be proven, but will global clients-and their pernickety CFOs-be willing to put their money where the Indian mouth is? One of the challenges is clearly on the marketing front. As Vineet Nayar, President, HCL, points out: "Indian it companies spend today anywhere between 8 per cent and 14-15 per cent in sales and marketing. This is grossly inadequate. The competition will intensify-not just from existing vendors, but also from vendors who will develop new business models-and unless enough dollars are spent in creating new markets and uncontested market spaces, I think there are tough times ahead." Adds Khosla of Patni: "Outsourcing 3.0 is set to begin, which will result in the clear polarisation of tiers. In two years, the NASSCOM Top 10 will look different." Clearly there will be MNC vendors-including European and Canadian-who will seek to perfect the Indian global delivery model by simply buying out an Indian player.

That there's a humungous opportunity up for grabs is clearly not up for debate. The moot point is whether the selective, single-process, multi-vendor outsourcing model will work for clients in the years ahead, or whether they will step back to the traditional single-vendor, mega-contract strategy. How successful the Indian vendors are in delivery might well determine if the current evolving trend becomes an established one. And even it does get established, it isn't as if the Indian it services industry will automatically be assured of chunks of the pie. As TPI's Aitchison warns: "The opportunity (to grab pieces of renewal contracts) will be fiercely competed for by the incumbents, who have all been aggressively expanding their global service delivery models." Nandan Nilekani, CEO, Infosys, sums it up best when he says: "It's a game for us to lose, not for them to win."

-Additional reporting by Mahesh Nayak in Mumbai and Rahul Sachitanand in Bangalore