A lot is happening on the domestic IT outsourcing front in India. Recently, Indian telecom services provider Idea Cellular awarded a 10-year IT and customer relationship management outsourcing deal valued at around $800 million to IBM (NYSE:IBM). Another telecom major, Hutchison Essar has announced plans to outsource its IT function to IBM this year.

Other domestic IT deals include Dabur signing a 10-year outsourcing agreement with Accenture (NYSE:ACN). Also Bharti Televentures signed a 10-year $700 million deal with IBM adding to its India outsourcing deal kitty.

While the top guns of the Indian IT outsourcing service providers including Infosys (Nasdaq:INFY), TCS and Wipro (NYSE:WIT) are busy striking deals and acquiring clients in the US and Europe (and off late in China and Japan), the global IT firms are increasing presence, building low-cost capability and tapping the outsourcing opportunity in the domestic Indian market. While domestic revenues of TCS and Wipro are less than 10% of their total IT revenues, Infosys does not have any domestic revenue. So are the India IT companies missing the action on their homeground?

The Current Scenario And The Opportunity
India has and continues to be in the limelight for its tremendous growth in the IT and BPO industry. While the industry has achieved success in the IT and BPO exports, a latent opportunity also lies in its domestic market. The domestic IT service market is expected to grow to $5.6 billion in FY07 while it grew at a 29% to touch $4.5 billion in FY 06.

Till now, telecom and financial services sectors have been high on IT outsourcing.
Computerization is a big enabler of outsourcing as it makes seamless on-line integration of activities possible. It is estimated that banks in India have spent more than USD 700 million on IT during FY06. This speaks of the tremendous IT enabled back office work being carried out in these organizations. And most of these support services are expected to be outsourced.

The retail sector, that is similar to telecom in terms of the complexity and robustness of its IT systems, is expected to be the next big contender to outsource its IT needs. According to research and consulting firm Gartner, many IT outsourcing deals in the region of $250 million- $400 million are expected to unfold in the domestic market over the next two years. These mega domestic IT deals are expected to be lead by sectors like retail, manufacturing and government, apart from communications and financial services.

Service Outsourced
Services outsourced by the Indian companies range from designing, building and running IT systems to IT infrastructure. In the telecom sector, a critical area gaining outsourcing momentum is network management. Typically, network management comprises 50-55 percent of the cost of a telecom company’s operations. With more and more verticals coming into the outsourcing foray, range of services is expected to get wider and more diverse.

Going Forward
So far the domestic players have not been able to capitalize on the outsourcing boom in the country. Going forward, however, this is expected to change. While the global IT majors will retain a significant share of the mega IT deal market, the smaller deals segment is a market that can be captured by smaller pure domestic players. And the Indian IT giants are expected to give a tough challenge to the global companies, extending the offshore competition to the domestic turf.

 ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.

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