Indian tech majors like Wipro, Tata Consultancy services and Infosys Technologies are set to dominate the global outsourcing business in the coming years and unseat existing giants, predicts a new study.
"The Indian companies are evolving into truly global players, going beyond India and developing their international strategies by recruiting high-value talent in new markets like China and Russia," says consultancy major Katzenbach Partners.
"India-based IT and outsourcing companies could ultimately lead on a global basis, potentially unseating such giants as EDS, Computer Sciences, Capgemini, Unisys, Perot Systems, Accenture and BearingPoint."
Katzenbach Partners have used a new corporate performance parameter called the "relative value of growth" to determine the degree to which a firm is rewarded - in terms of market capitalization - for growth and improvement of margins.
A company with high relative value of growth tends to be rewarded handsomely for achieving high growth and also generally reports strong profit margins, says the study conducted among others by in-house analysts like Roopa Unnikrishnan.
A company rewarded by margin improvement tends to have an inferior profit margin and may realise less pronounced gains in shareholder value, due mainly to the difficulties of trying for cost improvements to retain long-running customers.
In analysing IT and outsourcing firms, the study finds Indian players to have a high relative value of growth rating. They are highly motivated to grow and the marketplace recognises its quality of their operations, cash flow and prospects.
But American and European companies have much lower relative value of growth rating, meaning their main incentive is to build value by cutting costs.
"The best of the Indian outsourcing companies derive 80-85 percent of their market capitalisation from investor growth expectations," said Nathaniel J. Mass, a senior fellow with the New York-based Katzenbach Partners.
"So we expect that they'll continue to invest in growth, invest in people and invest in client retention," said Mass, who also serves as the managing director of N.J. Mass Associates Inc.
"We believe the Indian companies will continue to invest in clients even three and four years into a contract, when half of all outsourcing deals normally would fall apart," said Richard Schroth, also is a senior fellow at the firm.
"We see a virtuous cycle with Indian outsourcing companies: strong growth boosts valuation ratios, which in turn create reinforcing incentives to grow," added Schroth, a technology and outsourcing expert.
The relative value of growth rating is 53.2 for Infosys, 25.6 for Wipro, 15.6 for Satyam Computer Services and 14.9 for Tata Consultancy Services, says the study.
Among US firms, Affiliated Computer Services has the strongest relative value of growth rating of 2.8, which is well below the Indian companies. Similarly, the rating is 1.5 for Perot Systems, 1.2 for Computer Science Corp and 0.8 for EDS.
"Our research into Indian outsourcing companies like Wipro shows that they seem to have benefited from being relatively new entrants into the US market," said Unnikrishnan.
"They do not have to unlearn old behaviours or adjust to old systems. Wipro has been focused on talent management, providing employees opportunities to innovate, experimenting and growing the company organically."
Some of the plusses credited to Indian firms include superior operating margins, obsession with quality, reinvestment in innovation, leadership in conformance to global standards and world-class corporate governance.
