Indian IT services market to touch $10 billion

Bangalore



January 24th, 2008

As user organizations continue to grapple with the challenge of high

attrition rates in internal IT departments, the Indian IT services market is

pegged to grow to $10.73 billion by 2011, at a five year compounded annual

growth rate (CAGR) of 23.2 percent, according to Gartner.

Key factors driving this growth are agility, growth, cost takeout and

innovation, Gartner said in a statement. But a factor which is acting as a prime

impetus for companies to consider external service providers (ESPs) is the

continuous turnover rates of key IT staff in the range of 15 - 20 percent.

"Growth of the IT services market is primarily being driven by economic

growth, high growth among the small and midsize businesses (SMBs), government

projects and increased customer focus. Many IT service providers, multinational

companies (MNCs) and domestic have now recognized this potential and developed

strategies exclusively for the domestic market," said Arup Roy, senior

research analyst, Gartner. "Many IT organizations are planning to spin off

their IT organization into an independent entity to capture the growing

opportunities."

The market segments that are expected to witness the strongest growth are

consulting, IT management and business process management (BPM) services with

five year CAGRs of 28.1, 23.8 and 27.1 per cent, respectively. Consulting

revenue, although coming from a small base, grew 30.1 percent to $340 million in

2006 compared with 2005.

As companies become more mature in their overall approach towards IT, it

becomes more complex and sophisticated; they invariably have to rely on external

providers to help them with consulting services.

IT management revenue grew 27.3 per cent from 2005 to $549 million in 2006.

Increased adoption of remote infrastructure management services has driven the

development of network operation centers / security operation centers, remote

management centers and other managed service offerings from ESPs. BPM in India

is a high growth area that is moving beyond traditional customer relationship

management (CRM) services.

The primary challenges that are driving organizations to engage business

process outsourcing (BPO) are cost, growth and business innovation. The primary

objectives of BPO engagements are productivity improvements, process/business

transformation, and cost-containment to improve profits.

Both global and Indian vendors have leveraged these growth areas and the top

three vendors, IBM, Tata Consultancy Services (TCS) and Wipro Infotech, together

accounted for 26.1 per cent of IT services vendor market share in 2006.

In 2006, IBM surpassed TCS to become the top vendor, taking 11.2 per cent

market share. TCS and Wipro occupy the second and third positions with 10.9 and

4.1 percent market shares, respectively.

However, the Indian IT services market is still fragmented, with the majority

of the market being serviced by smaller local players that account for close to

40 per cent of the IT services market.

On the vendor landscape, Roy said, "As the market matures, competition

will intensify and then lead to consolidation. Larger, more-aggressive

competitors will acquire vendors that are unable to find a niche for themselves,

or smaller vendors with no real differentiators. End user IT organizations or

captive unit spin-offs will have a difficult time in competing with

well-established providers unless they also find their own niche."