The traditional business model of Indian’s IT outsourcing industry – providing low margin, commodity IT services at high volume – has "maxed out", according to a new report from Constellation Research.
Wage inflation in India and increased competition from rival offshore destinations has eroded the industry’s profit margins.
Meanwhile, customer demand has changed. Line of business managers and CFOs have a growing influence on IT sourcing decisions, and they prefer to pay for services on the basis of business outcomes, rather than time and materials.
"The classic time-and-materials, skilled body shop market has maxed out," wrote the report’s author, Constellation founder R "Ray" Wang.
Wang argues that there are four ways that Indian IT providers can rise above the traditional body-shopping model.
The first is to develop their own intellectual property. In a typical IT services engagement, any innovation or expertise developed to help solve the customer’s problems is not shared with other customers. By wrapping IT services as repeatable products, IT outsourcers can build their own IP into those products and differentiate themselves from their competitors.
Wang points to Wipro and Infosys as two examples of India IT providers that have had some success in ‘service productisation’.
Another approach is to aggregate, process and analyse useful information for customers. A company called L&T Infotech, for example, offers a cloud-based social media analytics service, using natural language processing and sentiment analysis to help customers track market perception.
The third is to help customers design and develop new products and services. Wang says Wipro’s engineering services group has successfully achieved this, helping customers develop products that range from smart meters to portable dishwashers.
Finally, Wang says that IT services providers must "invert" their approach to partnering with enterprise software vendors. At the moment, it is the IT services providers that seek certification from the vendors, but it should be the other around.
"IT services firms know the clients the best," he writes. Service providers should build ecosystems of partners that have selected for their ability to serve client needs.
"It is a now-or-never situation for IT services firms, as the software giants may in the near future encroach upon the IT services space via acquisitions, leaving some of their valued partners in the lurch."
Buying organisations should challenge their IT services providers to become ‘innovators and creators’. To do this, they must share their strategic vision with those providers, and allow them the freedom to experiment – and perhaps fail – with new technology ideas.
"Indian IT services companies have proven their ability to operate and execute on infrastructure and delivery," Wang writes. "The next battle will be to offer trusted advice on the path to innovation and IP creation."