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Outsourcing 2.0: IT Services' New Wave

Technological adaptation and moderating revenue growth will characterize the next stage for Indian IT services firms.

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Over the past decade, Indian IT services providers  Tata Consultancy Services (TCS),  Wipro (WIT), and  Infosys (INFY) have emerged from relative obscurity to become IT services behemoths rivaling traditional Western incumbents such as Accenture (ACN) and Capgemini (CAP). Over this time, explosive growth in revenue (20%-40% annually) and head count (also 20%-40% annually) has been fueled by labor arbitrage and a lower-cost delivery model. We believe TCS, Wipro, and Infosys now sit at a crossroads, and strategic decisions being made today will have major implications for future financial performance and competitive positions.

We think the IT services industry is fundamentally changing and vendors will no longer be able to rely solely on their low-cost position for outsize revenue growth. Developments surrounding automation and social, mobile, analytics, and cloud (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; they will increasingly seek consulting partners that offer technologically differentiated services based on new technology platforms and tools. So far, we think TCS, Wipro, and Infosys are appropriately adapting to the challenges of Outsourcing 2.0 and deploying capital to the right areas. Advantages in global delivery, domain expertise, and financial resources should help protect these vendors from any precipitous slide in competitive positioning over the long term.

Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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