With half the financial year gone, it is increasingly clear that the global slowdown has speeded up a structural change that has been taking place in the Indian software industry for quite some time now. The medium-sized firms are getting squeezed more and it is the market leaders that are better able to survive. Firms like TCS and Infosys have clocked modest but clear top line growth in the first half, whereas established mid-sized players have in many instances posted a fall in top line in relation to the same period of the previous year. The trend was set with the high profile $1.5-billion BP deal awarded a couple of months ago in which the Indian leaders figured prominently but the total number of vendors was cut down from 40 to just five! This implied the elimination of many mid-sized vendors, in whichever geography they may have been located. What is significant is that this pattern is not likely to change in the period ahead as western economies begin to get back to the growth path — to business as usual if not boom time again. Leading US financial institutions, which are returning the funds they had obtained from the federal Troubled Asset Relief Programme and going back to resuming their normal flow of placing outsourcing orders, will be turning increasingly to just the top few vendors.
Consolidation is natural in any industry as it matures but the call that has to be taken is whether outsourcing, in particularly those parts of IT like software development and maintenance in which Indian firms concentrate, is into that phase. Judging by the opportunity that still exists in outsourcing, it is a business that has tremendous growth ahead of it. But it is also true that the ability to survive on pure cost arbitrage is limited, particularly as other lower cost players like Vietnam, extended Europe and China (the latter two can offer specific language skills) have got into the play very keenly. So the smaller players have to survive on two attributes. They have to overcome the disadvantage of offering lower end skills by also offering specific deep industry knowledge — knowing a particular vertical better than most. They have also to rely on customer familiarity or loyalty. If you have served a customer long and well, then it is likely to stick to you irrespective of any advantage that vendor consolidation may bring.
But there is no doubt that the path of organic growth from small to medium to big will not be open in the way it was when the industry was young. Those firms which are not so big will have to increasingly rely on niche offerings based on technology or process in order to keep growing. Newer areas that are opening up, like software as a service and cloud computing, hold opportunities for those with specific offerings. In particular, there is scope for those that may be able to offer a platform to host a particular set of solutions which clients in specific sectors can be happy to rely on. There will, of course, always be space for startups which can come up with IP-based winning products, a field in which the Indian presence is till now negligible. But the overall not so good news for medium-sized undifferentiated players is that the difficult times that the slowdown brought will not go away even as growth resumes.