Second-tier outsourcers in India can provide specialized services and domain expertise in areas which their larger competitors such as Tata Consultancy Services and Infosys Technologies may find too niche to address, according to a report from Forrester Research.
A large number of mature clients outsource high-volume work in the areas of infrastructure support, application maintenance, and business-process outsourcing to large Indian outsourcers, while working with smaller outsourcers on small, specialized projects, Sudin Apte, principal analyst at Forrester said on Monday.
Those outsourcers could be potential acquisition targets for larger outsourcers trying to get into new businesses, according to outsourcing consultancy firm, Technology Partners International (TPI).
Some second-tier outsourcers have specialized by focusing on certain technology services such as agile software development or domain expertise such as telecommunications operations support and billing software, according to Forrester.
Other companies have focused on specialization and innovation in the way they manage their relationships with their clients, Apte said.
These are specializations that larger outsourcers may not focus on unless they expect large volumes of business from it, he said. For example, testing started as a specialized service from smaller outsourcers but was adopted as a key service by many large outsourcers as the volume of testing business grew, he said.
Boutique players will always have a significant role in India's outsourcing industry, Siddharth Pai, a partner at TPI, said on Tuesday. But they have been going through trying times as customers tend to negotiate for lower rates than they pay to bigger outsourcers, and also because the smaller players find it difficult to attract and retain staff, he said.
Clients using offshore services for the first time often start with a small project using a midsize offshore firm, Forrester said.
There are also a large number of smaller companies that are planning to outsource to India, and they are looking for smaller outsourcers that can offer them specialized services as well as greater attention than they expect to get from larger outsourcers, Pai said.
Specialization may in fact be the only way forward for India's small and medium-size outsourcers as they do not have the scale, number of staff, and capital to compete with larger outsourcers focused on high-volume business, Apte said.
As the stock market valuations of some of the smaller outsourcers have come down during the recession, they are also likely to be ripe targets for acquisition by larger outsourcers, Pai said. The larger outsourcers may not acquire the entire company, but the specialized side of the business which they will use as a platform to get into what they see as potentially large business, he added.
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.