IT firms' growth strategy to change

The conventional offshoring equation of linking revenue growth to headcount increase will not be a correct method of gauging an IT firm's progress, says a Forrester report.

Many IT firms will shed up to 30 per cent of their non-strategic current clients to pursue a more specialised strategy and rebuild competitiveness.

The report also cautions 'Financial analysts' who continue to use obsolete metrics such as, number of people added in the quarter as a measure of growth, as this actually encourages a 'body shopping' mindset in the tier II suppliers.

And to meet stock market expectations, these firms continue picking up customer business all over the map in terms of skills, service lines, and industries served - ultimately lacking specialisation or niche play.

The report titled 'Surviving The Offshore Vendor Polarisation Puzzle' by Forrester states that many of these providers have added a huge army of new recruits in the past two years but unlike the top three players, these firms fail to grow revenue in proportion to the increase in headcount.

Sudin Apte, senior analyst and author of the report said: "Polarisation between the offshore providers in India has accelerated. India's top three providers - Infosys, Tata Consultancy Services, and Wipro - now drive almost half of India's total IT services exports by value.

While Cognizant, HCL, and Satyam still hold their ground and continue to grow, most non-specialised and undifferentiated tier II and tier III firms stand to lose because margin pressures do not allow them to invest enough in building specialisation or take proactive initiatives to help clients ramp up."

The report predicts that in an all-out survival attempt, these firms will initiate a strategy overhaul and take steps such as divorcing non-strategic clients or shifting from a pure services play to an IP or solution accelerator proposition.

"I also see them making niche acquisitions - instead of sell-out, as a way forward. The top executive mood to rebuild the organisations will prevent any mass M&A in this space, unless these firms face negative cash flows. On the contrary, we expect to see more boutique capability acquisitions," adds Apte.

Apte cautions the financial analyst community tracking IT firms that they can no more rely on the conventional offshore equation; plainly linking revenue growth to the headcount growth.