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India's Top 3 Challenge the Global Top 3

Survey question: As first reported by the Vantive software marketing blog, which of the following announcements was the bigger story within the outsourcing and global IT services industry?

On August 26, 2008, computer manufacturer HP completed its $13.9 billion acquisition of system integrator EDC. According to HP, with the value of the EDS purchase the new company is the largest is the largest global integrator in the IT (informatoin technology) services sector and the second-largest acquisition in the technology industry (since HP acquired Compaq back in 2002). The combined companies 2007 fiscal revenues for services operations amounted to more than $38 billion and a staff count of 210,000 employees in 80 countries; OR

The day before, India-based Infosys Technologies reached an agreement for the $753 million cash purchase of U.K.-based SAP AG consulting firm Axon Group. Axon had 2007 revenues of $378 million and strong enterprise resource planning (ERP) software skills. Axon operates in the UK, North America, Malaysia and Australia. The acquisition is the largest overseas IT services acquisition by an Indian company.

If the combined HP/EDS mega acquisition seems like the easy choice, consider the newest outsourcing and global systems integrator forecast by research firm Gartner. According to an August 2008 research report, the analyst firm believes that Indian-based IT services companies of Tata, Infosys and Wipro are emerging as the next generation of global IT services leaders. Gartner has even coined these three system integrators and IT services firms with the name of 'India-3.'

According to Gartner researchers in their analysis report, "These (India-3) vendors are increasingly being considered for strategic service deals, and will augment or, in some cases, replace today's acknowledged megavendors by revenue -- IBM Global Services, Accenture and EDS -- in this space by 2011." The Gartner report was released after the HP/EDS acquisition was announced but before it closed in August 2008. A look at the size and growth of the global IT services firm is illustrated below.

 Integrator Revenue Growth Headcount Market Cap
 Tata $5.7B 32% 111,407 $27.8B
 Infosys $4.2B 35% 91,187 $23.6B
 Wipro $3.4B 38% 82,122 $17.4B
 IBM Global $54.1B 12% 368,558 $150B
 Accenture $22.1B 4% 170,000 $23.9B
 EDS $21.5B 18% 139,000 $9.5B

Gartner researcher Partha Iyengar commented the India-3 continued to post dramatic growth even after entering the $1 billion-plus revenue threshold. That's a level achieved by only 100 service enterprises globally, and normally a level that slows an IT service firm's continued growth as the company reaches a level of maturity.

Tata Consulting Services (TCS) is the largest and possibly well known of the India-3, with just over $5.7 billion in 2007 revenues. Its sales growth over the past three years was 32% in 2007, 45% in 2006 and 33% in 2005. Infosys demonstrated growth of 35% in 2007, 44% in 2006 and 35% in 2005. Not to be left behind, Wipro achieved revenue growth of 38% in 2007, 36% in 2006 and 34% in 2005.

When compared against the American IT services giants, IBM's $54 billion revenue achievement saw a 12% growth in 2007, 2% growth in 2006 and 2% growth in 2005. Accenture grew at 4% in 2007, 8% in 2006 and actually lost a half of 1% in 2005. EDS faired much better with 18% growth in 2007, 7% growth in 2006 and 13% growth in 2005.

The shift in global IT services is occurring at a material pace. While the American IT services firms have growth in the single digits or low double digits, the India-3 have been growing at 30% to 40% annually.

The India-3 firms are riding several helpful trends and economic conditions. There is a clear increasing acceptance of offshore outsourcing and India has emerged as a global outsourcer and economic power. Further, India's population is growing to the extent that the U.S. Census Bureau forecasts that the country will exceed China as the world's most populous nation by 2026.

According to analyst firm Gartner, the India-3 IT services companies share four critical competencies that fuel their success: "process excellence, world-class HR (human resource) practices, providing high-quality services at a low cost, and the gaining significant and disproportionate 'mind share' compared to their actual size."

However, the India-3 have much growth to achieve before they catch IBM, Accenture and HP/EDS. For one critical metric, Iyengar suggests that the India-3 must come closer to the U.S.-based firms' revenue-per-employee (RPE) figures to sustain their continued growth. Over the prior four years, IBM Global Services, Accenture and EDS have earned RPE in the range of $130,000 to $192,000. The India-3 have ranged from $32,000 to $51,000, demonstrating a sizable gap.




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