The future of the Indian IT/BPO industry has never been brighter. The most recent nasscom-McKinsey report estimates the addressable offshore opportunity at over $300 billion (Rs 1,350,000 crore), $110 billion (Rs 495,000 crore) of which is realisable by 2010 and $60 billion (Rs 270,000 crore) by Indian players. Analysts report over $100 billion (Rs 450,000 crore) in outsourcing contracts are up for renewal over the next two years and several of these customers seek to "multi-source" large contracts. Finally, our billion-dollar babies, are increasingly invited to bid for, and are winning, several $100 million-plus deals. We seem almost destined to win, but do we know what we're winning?

There are two dimensions to this uncertainty that vendors need to understand more fully. First, a deeper look at the nasscom-McKinsey projections reveal that over 70 per cent of the growth in it and 80 per cent in BPO come from areas relatively new to Indian offshore vendors, including systems integration and infrastructure outsourcing in it, and several industry-specific processes in areas like travel & hospitality and automotive manufacturing in BPO. Do these new areas require skill or scale-based competition? Do you have to adapt or separate your existing commercial and operating model to compete? Second, a recent review of several large outsourcing deals by McKinsey's Business Technology Operations practice reveals that approximately 50 per cent of large deals fall short on customer and vendor expectations, failing to deliver intended results. Companies are often so focussed on getting rock-bottom prices and vendors on winning big-ticket deals, they both often agree to risky arrangements with uncertain cost projections. What will Indian vendors do differently to avoid pure price-based competition in larger deals?

Indian vendors need to think about two key elements: managing uncertainty and deepening specialisation. The management's ability to deal with the uncertainty of larger deals, whose economics are less clear at the outset, will require at least three new skills. Knowing how to organise for mega deals, whose pursuit costs can be very high involving multiple stakeholders and advisors. Making economics on large deals work in your favour, especially when multiple parts of the technology stack including business process, applications and infrastructure are included and abilities in one or more of these areas may be weak. The ability to underwrite calculated risks, especially when customers demand fixed price guarantees and there is no clear line-of-sight to future economics.

Next, deepening specialisation is an industry imperative, in the face of commoditising generic Application Development/Application Maintenance and voice-based bpo service lines, and cost-based competition from other low cost countries. Options to consider under specialisation are:

The IT specialist(s): A focussed it-oriented service provider focussed on one or more major industry verticals like financial services, travel & hospitality, or automotive manufacturing, with a deep understanding of industry-specific enterprise applications and integration issues. Alternatively, building an industry agnostic service line like desktop infrastructure management and provisioning, or horizontal application integration and off-license support.

The ADM factory: A global low-cost provider of applications development and maintenance services enabled by a 'lean' operating environment. Built with a manufacturing mindset of superior operations scalability, such a player would employ over 50,000 developers in India and other low-cost geographies and produce the lowest unit-cost developer. An ADM factory would have relationships with large/mid-sized enterprises, and consulting and systems integration firms that cannot afford to build low-cost global delivery.

The BPO Specialist(s): There are three flavors of specialisation among BPO providers. First, an operator of industry-standard transaction or platform-based services, like card or payroll processing, relying on standardisation and scale to achieve the lowest unit-cost per transaction possible. Second, a business reengineering provider that has industry-specific expertise on improving productivity via both process and it redesign. Third, highly specialised services that require professional training/certification, such as legal, chip design or radiology services.

The Global Champion: A full service integrated global it and BPO provider offering multiple service lines to large global companies. Their specialisation is the ability to integrate services across multiple units/providers and manage large and complex accounts, delivering several services seamlessly. These companies will have global delivery centers/partners across India, China, Eastern Europe and Latin America.

So, we're back to the classic question of where to compete and how to secure superior returns while meeting customer and market expectations. We're drunk on the fumes of potential, growth is baked into promising valuations, and we've seen global it services majors sacrifice profitability at the altar of growth. Our future has arrived, how can we avoid being blinded by it?

Vivek Pandit is a Partner in McKinsey's Mumbai office, leader of McKinsey's Software & Services Practice in Asia, and a co-author of the NASSCOM-McKinsey 2005 report