For Sourcing & Vendor Management Professionals

July 31, 2013

The Changing Value Proposition For Midsized Outsourcers

The Agility, Flexibility, And Specialization Of Midsized Players Is At A Premium In A
Changing Technology Environment
by Hansa Iyengar
with Chris Andrews and Fraser Tibbetts

Why Read This Report

Choosing the right supplier for a particular engagement, out of a multitude of offshore vendors, is not
an easy task; especially when considering the constantly evolving subtleties of cost and delivery options
in a highly dynamic and competitive environment. Although large IT services vendors such as Tata
Consultancy Services, Cognizant, Infosys Limited, Wipro IT Business, and HCL still capture the majority
of offshoring deals, there is a changing value proposition that favors midsized market players one
that will increase in importance in coming years. These suppliers bring flexibility, agility, and business
alignment to a marketplace that for the past decade has been obsessed with growing scale. We spoke
with several midsized Indian offshore vendors to uncover the aggregate strengths of the midsized vendor
segment, their unique differentiators, and the reasons why a midsized vendor might be the right choice for
certain types of engagements.
Market demands CREATE Opportunity for midSized PLAYERS
Over the past decade, it has become common to refer to the offshore outsourcing space in terms of scale
by categorizing vendors as tier 1 players and tier 2 players. The fastest growing vendors, in terms of
size, were labeled tier 1, while the others were relegated to tier 2 status. However, the market dynamics
have changed. Clients today emphasize a need for vendor agility, flexibility, the ability to offer business
solutions that stem from tight vertical (and subvertical) alignment, responsiveness, and trust. Scale alone
is no longer the only factor under consideration when sourcing suppliers for engagements, and midsized
vendors will be playing a key role in the future of offshoring.1
Some of the major dynamics that are affecting the growth of this vendor segment include the following:

Price is no longer the only factor that significantly affects a companys vendor choice. The

service provider has moved up the value chain from being a low-cost alternative for sourcing
noncore functions to a partner who is increasingly involved in critical aspects of the clients
business. The depth of technological knowledge and service-level expertise that a supplier can bring
to the engagement and the customers business as a whole is becoming an influential factor in the
vendor selection process. Over 80% of the respondents to the Forrsights services survey believe that
possessing specific service-level capabilities is critical when selecting vendors, a figure that is equal to
the number of respondents who value the ability to provide cost savings (see Figure 1).

Engagements are becoming more specific. Although outsourcing is still popular as a means to

rein in costs, businesses are increasingly turning to technology to find newer ways to connect with
their end customers in a 24x7 world. The number of highly specific initiatives undertaken to build
competitive differentiators and improve customer experience within the enterprise segment has seen
Headquarters
Forrester Research, Inc., 60 Acorn Park Drive, Cambridge, MA, 02140 USA
Tel: +1 617.613.6000 Fax: +1 617.613.5000 www.forrester.com

For Sourcing & Vendor Management Professionals

The Changing Value Proposition For Midsized Outsourcers

rapid growth over the last few years. These front office initiatives, with visibility from business
leaders, require suppliers to possess intricate knowledge of the industry dynamics and business
processes in an enterprises vertical. They also place greater emphasis on vendors ability to drive
innovation by championing initiatives for improving the business ability to deliver enhanced
services to its end customers. In this scenario, a vendors ability to bring executive leadership to
the table as a strategic partner and not just a service provider is becoming a key factor in
the selection process.

Demand from the small and midsized enterprise segment (SME) is increasing. We see

increasing demand from the SME segment for outsourcing as a driver of efficiencies and faster
time-to-market. Enterprises in this segment continually require greater levels of customized
services; however, they often have very small budgets. These SMEs are often overlooked by
the larger vendors because the smaller scale of the engagements offers fewer opportunities for
delivering industrialized services and thereby inadequate return on investments. These are
the sweet spots for the midsized vendors who come in with their skills in dealing with niche
business areas, deep vertical expertise, experience in handling smaller projects, and ability to
offer highly competitive and flexible pricing while maintaining service quality.

Figure 1 Expertise In Specific Technologies Or Verticals Is Gaining Importance

How important are the following criteria to your firm when selecting IT service providers?
(Not all responses shown)
Important
Price or cost savings
Capability with the specific services
we are seeking

Very important
32%
36%

Overall expertise in a particular

technology or platform

38%

Knowledge/expertise with my firms

industry-specific business processes

38%

Knowledge/experience with my
firms industry or business vertical
Cultural fit

49%
45%
40%
30%

36%
33%

30%
19%

Base: 1,058 IT services decision-makers

Source: Forrsights Services Survey, Q2 2012
99584

2013, Forrester Research, Inc. Reproduction Prohibited

Source: Forrester Research, Inc.

July 31, 2013

For Sourcing & Vendor Management Professionals

The Changing Value Proposition For Midsized Outsourcers

Midsized vendors Refine their value proposition

The value proposition for midsized players will evolve in a highly competitive marketplace. In some
cases, midsized suppliers may not have the scale and breadth of capabilities to offer end-to-end
services, and some clients tell Forrester that, as they rationalize their offshore mix, some services
partners will be eliminated from their supplier portfolios.
However, Forrester expects that this consolidation will happen selectively. While 46% of IT services
customers indicate that they plan to consolidate spending with a smaller group of suppliers, roughly
25% tell Forrester that they are expanding offshore work and adding new suppliers meaning that
consolidations do not preclude using midsized players. In many cases, midsized players are often
brought in as specialists to provide highly customized or niche services on engagements where
subsegment specialization is needed. Further, shrinking deal sizes and a selective-sourcing approach
have emboldened midsized vendors to seek share-of-wallet from the incumbents. The unique value
propositions for these midsized vendors include:

An increased focus on their specializations. For years, no midsized player would admit to its

differentiation, lest it be pigeon-holed as a specialist provider and cut out of other deals. Yet, a
majority of midsized vendors have built their business propositions around differentiated offerings
for specialized subverticals such as air traffic management and passenger analytics within airlines;
port operations automation and freight management within shipping and logistics; and hotel
management solutions within travel and tourism. This specialization is welcomed by clients, who
increasingly need access to a well-trained, stable workforce to execute projects. They have also
been able to build substantial domain and technological specializations around the core issues
particular to these verticals and are often leveraged as best-of-breed providers. A list of the vertical
and service portfolios for the vendors interviewed for this report is provided (see Figure 2).

Recognition that their smaller size has benefits when working with smaller clients. In the

past, the smaller size of midsized vendors meant that they had to fight harder to grow business.
They achieved this with an unrelenting focus on customer satisfaction. This emphasis on
customer satisfaction is proving beneficial for this vendor segment, as customers are willing
to trust them on their front office initiatives. For instance, Mindtree is doing a high-profile
engagement with a leading US hotel chain developing a mobile solution to enable real-time
interaction between their event management staff and event organizers, increasing the efficiency
and effectiveness of the hotels event management services. A crucial part of the midsized
vendors value proposition is that they are highly adaptable to clients pricing, delivery location,
and staffing requirements. This flexibility is essential because about 95% of their engagements
fall in the sub-$5 million range and they must be able to adapt to client requirements to win,
retain, and increase share-of-wallet from these customers (see Figure 3).

An ability to attract and retain lateral talent. Attrition, especially at higher levels within the

management and technical delivery teams, remains well below 10% across all the midsized
vendors we spoke to, compared to the industry average of 14-17% as per NASSCOM estimates.

2013, Forrester Research, Inc. Reproduction Prohibited

July 31, 2013

For Sourcing & Vendor Management Professionals

The Changing Value Proposition For Midsized Outsourcers

The investments they make in attracting and retaining lateral hires enables these vendors to
build deep wells of expertise, better positioning them to deliver in the areas in which clients put
emphasis on the quality of resources rather than the quantity.
With pockets of deep specialization, a focus on limited verticals, and experience with smaller
engagements, the midsized vendor segment makes for a better alternative when sourcing for specific
skills rather than scale. These vendors are also very relevant for clients looking for an agile, flexible,
and accommodating supplier for smaller engagements.
Figure 2 Midsized Vendors Specialize In Specific Niches
Vendor

Specializations

3i Infotech

Portfolio of proprietary software for the BFSI segment from core banking solutions to
anti-money laundering and treasury solutions in banking, to investment management
solutions and core general and life insurance solutions in financial services and insurance.
Varied services portfolio for the BFSI segment from platform-based testing services to
application development and maintenance and infrastructure management services.
Strong ERP skills in the manufacturing, retail and distribution segments.

Firstsource

Collections, transaction processing, and customer management BPO services across all
channels such as voice, web chat, social media, email, IVR/self help, etc.
Strong suite of platform-based BPO services, especially around workforce management, order
management and provisioning, fraud management, customer insights/analytics, and social
media analytics and reporting.

Hexaware

Strong skills across ERP products from SAP, PeopleSoft, Oracle E-Business Suite, Fusion,
Workday, SFDC, etc., around a limited set of verticals.
Strong suite of business intelligence/analytics offerings.
Comprehensive set of solutions around quality assurance and testing.
Rapidly growing remote infrastructure management services.
Deep vertical expertise in the travel and transportation, financial services, and healthcare
(specifically US healthcare) segments.

ITC Infotech

Very strong infrastructure services, testing, CRM (loyalty), and SAP practices.
Deep vertical expertise in industries like manufacturing, BFSI, hospitality, consumer packaged
goods (CPG), and retail (especially fashion retail).
Several proprietary solutions and solution accelerators for customer-focused industries,
especially around managing customer loyalty programs, managing and reporting corporate
sustainability performance, and transaction monitoring (order management capabilities) for
trade routing systems.

L&T Infotech

Ability to leverage the presence of parent company, Larsen & Toubro Limited, in sectors such
as technology, energy and petrochemicals, power, manufacturing, financial services,
insurance, and engineering and construction.
Deep vertical and subvertical expertise in niche sectors within oil and gas financial services,
media and entertainment, automobiles and aerospace, manufacturing, travel and logistics,
and plant equipment and industrial machinery.

Mindtree

Strong portfolio of BI/analytics offerings for industries such as consumer packaged goods,
retail, media, and travel.
Impressive portfolio of proprietary frameworks, solutions, and products across focus verticals
(including Agile development, testing, infrastructure).
Niche skills within the BFSI segment in areas such as compliance, customer, and risk
management.

99584

2013, Forrester Research, Inc. Reproduction Prohibited

Source: Forrester Research, Inc.

July 31, 2013

For Sourcing & Vendor Management Professionals

The Changing Value Proposition For Midsized Outsourcers

Figure 2 Midsized Vendors Specialize In Specific Niches (Cont.)

Vendor

Specializations

Sonata

Deep subvertical specializations across areas like multichannel commerce, POS systems,
supply chain, sales and marketing solutions, and BI in the retail segment.
Expertise in subsegments within the travel and transportation vertical like packaged tour
operators, business travel agencies, ISVs in the travel segment, and airlines.

UST Global

Deep specializations around areas such as grocery retail/supermarkets within the retail
segment and payer insurance within the healthcare segment.
End-to-end offerings in mobility services, from mobility strategy consulting through
implementation.
Expertise in legacy modernization and portfolio rationalization across focus verticals.

Virtusa

Strong specializations within BFSI around areas like customer onboarding, fraud and risk
management, loan origination, compliance solutions, claims management and recovery,
policy management, and underwriting services and support.
Heavily focused on driving innovation for clients by engaging with them to help design,
develop, and deliver new products and services, a focus that comes from their engineering
and product development heritage.
Source: Forrester Research, Inc.

99584

Figure 3 The Majority Of Engagements For Midsized Vendors Fall In The Sub-$5 Million Range
Clients with contract values
of $10-$25 million (USD)?
8%

Clients with contract values of

$25 million (USD) or more?
2%

Clients with contract values of

$5-$10 million (USD)?
12%

Clients with contract values of

$5 million (USD) or less?
78%
Base: 2,228 client contracts
Source: Data collected from 8 different IT services providers
99584

2013, Forrester Research, Inc. Reproduction Prohibited

Source: Forrester Research, Inc.

July 31, 2013

For Sourcing & Vendor Management Professionals

The Changing Value Proposition For Midsized Outsourcers

r e c o m m e n d at i o n s

when engaging with a midsized vendor, Exercise DUE DILIGENCE

As selective-sourcing becomes prolific, midsized vendors offer a great option for customers wanting
to re-evaluate existing vendor relationships. However, the difference between true differentiation and
good marketing is a subtle one, and youll need to invest in your due diligence process. Some of the
factors that sourcing professionals need to keep in mind while evaluating these providers include:

Identifying the right opportunities for a midsized player. Identify the project objectives
and invest in finding the service provider who can add the most value to the project and
its outcomes. Managed well, these smaller vendors can often add greater value to the
outcome due to their experience with, and expertise in, niche services.

Asking tough questions in the due diligence stage. Completing a due diligence and

maintaining dialogue to better identify precise areas where specializations exist and
where these special skills might fit into your requirements is a necessity. In all cases, ask
for references and examples of the business results that the supplier achieved. Ask your
provider to describe its capabilities in new areas of offshore market differentiation, such
as Agile development capabilities, and its ability to apply reusable software assets to your
industry-specific needs.

Investing in your backup plan. This vendor segment is relatively volatile, in that its prone
to mergers and acquisitions. Further, as pressure on the offshore marketplace continues
to grow, Forrester expects some of the more specialized vendors to become acquisition
targets. For these reasons, youll need to design contingency plans designed to prevent
service delivery disruption in case of such an event.

Leveraging them for price competition. Midsized vendors tend to have competitive

billing rates and flexible pricing models and contract structures. They are generally agile
because their smaller size results in faster decision-making processes and relatively lower
overhead. You can use them to challenge the prices of tier 1 suppliers and increase the
competitiveness of bids.

w h at i t m e a n s

a midsized vendor makes sense in the correct circumstances

Sourcing professionals need to take notice of these budding services providers because they offer
more options when it comes to identifying the right supplier for their engagements. Some of the
situations in which a midsized provider can be highly relevant include:

2013, Forrester Research, Inc. Reproduction Prohibited

July 31, 2013

For Sourcing & Vendor Management Professionals

The Changing Value Proposition For Midsized Outsourcers

When you are looking for specialized expertise. Utilizing a midsized vendor makes sense

when sourcing for smaller project-based engagements that require specific technical or
subvertical expertise or demand a high level of attention to detail from the service provider.
They can also compensate for shortcomings due to seasonal fluctuations in business volumes.

When budgets are scarce. Utilize midsized vendors when sourcing for engagements that

require extensive offshoring as part of a wider initiative but within a budget constraint.
Because most of the employee base for these midsized vendors is based offshore, they would
be a strategic fit for this scenario.

When you come from the SME or midmarket. Utilize midsized vendors when sourcing for
SME customers who often do not get the attention of the larger providers due to the smaller
size of their engagements or the need for highly customized offerings, where you need the
ear of executive-level resources at your vendor.

Endnotes
Vendors included in this report are 3i Infotech, Firstsource, Hexaware, ITC Infotech, L&T Infotech,
Mindtree, Sonata, UST Global, and Virtusa. Basic details about their horizontal and vertical focus, delivery
locations, and FTEs were collected through an initial questionnaire which was followed up by in-depth
vendor interviews.

Forrester Research, Inc. (Nasdaq: FORR) is an independent research company that provides pragmatic and forward-thinking advice to global leaders in business and technology.
Forrester works with professionals in 13 key roles at major companies providing proprietary research, customer insight, consulting, events, and peer-to-peer executive programs.
For more than 29 years, Forrester has been making IT, marketing, and technology industry leaders successful every day. For more information, visit www.forrester.com.
2013 Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRankings, and Total Economic Impact are trademarks of Forrester
Research, Inc. All other trademarks are the property of their respective owners. Reproduction or sharing of this content in any form without prior written permission is strictly
prohibited. To purchase reprints of this document, please email clientsupport@forrester.com. For additional reproduction and usage information, see Forresters Citation Policy
99584
located at www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.