IT services head offshore

The battle lines have been drawn, with tier-one providers such as IBM Global Services, CSC, EDS and CGEY all gearing up to grow their own units in India.

With price competition driving the move, many of these companies are being forced to build their offshore businesses or risk a reduced ability to win major projects.

The shift to offshore provision has made a dramatic impact on the profitability and revenue streams of western providers. During the quarter ended December 2002, for example, established offshore provider Infosys Technologies generated a net margin of 26% with revenue up 45%, compared with western tier-one provider EDS, which for the same period made a net margin of just 6.5% on revenue down 5.1%.

Many of the tier-one IT services companies are planning offensives on the Indian market, where several aim to grow three-fold over the next couple of years. Cap Gemini Ernst & Young (CGEY) is aiming to increase its headcount from 600 to between 1,500 and 2,000 in India by the end of 2003; EDS is targeting growth from 900 to around 5,000 employees by 2004; and CSC plans to add 1,400 software engineers and two new development centers to its 700-strong operation in India over the next two years.

Accenture employs approximately 1,000 staff in India, although it has not yet formally announced its strategy in the market. IBM GS has the largest presence following its $3.5 billion acquisition of PwC Consulting last year. It employs some 4,700 staff in India, and expects to grow this number to about 10,000 by the end of this year.

Meanwhile, CGEY is currently working on about 40 projects in India for western clients. These projects include development work around ERP, Siebel CRM, application management, infrastructure management, and nine SAP projects, and also include project management for five major oil companies where it is developing bespoke SAP and JD Edwards applications.

Severe price competition has been at the heart of the shift in focus, with offshore developers lowering the cost of delivering application development, systems integration, support, and business process outsourcing projects, to clients. This has had a major effect on the ability of western tier-one players to win application development and integration projects, which have either been pulled altogether or handed to offshore rivals.

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