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By Andrew Lange | 03-31-2015 11:00 AM

Outsourcing 2.0: Which IT Service Firms Are Ready?

Tata, Wipro, and Infosys should maintain their industry positioning as the industry evolves, says Morningstar's Andrew Lange.

We recently published an IT-services-related report that looks into the next era of outsourcing for the three major Indian IT service vendors--Tata Consulting (TCS), Wipro (WIT), and Infosys (INFY). For these vendors, the past decade or so has been characterized by hypergrowth, which has been driven by advantages in labor arbitrage and a lower-cost delivery model. But we believe the market is fundamentally changing. From this point, we believe these vendors will no longer be able to rely solely on their low-cost positions for outsized revenue growth in the future.

Importantly, developments surrounding automation as well as social, mobile, analytics, and cloud (or SMAC) technologies are expected to usher in a new era of outsourcing, in a movement that we call "Outsourcing 2.0." Here, we believe clients will demand more than just cost savings alone; instead, they will increasingly seek consulting partners that offer technologically differentiated services based around new technology platforms and tools.

While this fundamental shift presents long-term challenges for the Indian IT service vendors' traditional business models, so far, we think Tata, Wipro, and Infosys are appropriately adapting to the challenges of Outsourcing 2.0 and deploying capital to the right areas. Additionally, advantages in global delivery, domain expertise, and financial resources should help protect these vendors from any precipitous slide in competitive positioning.

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