Indian Tech Firms Diversify

The move by Infosys to acquire a British consultancy is another sign of Indian service firms moving up the value chain.

The $750 million purchase of British consultancy Axon Group by Infosys Technologies, announced in August, was the latest sign that the Indian technology industry is entering a new stage of maturity.

The size of the deal, one of the biggest foreign acquisitions by a subcontinental technology firm, made it notable. But more important is the nature of the acquired company, which specializes in SAP implementations. Infosys, long a provider of basic technology services and outsourcing, wants to move up the value chain into more sophisticated markets. Other major Indian tech companies are expected to follow its lead.

One reason for the push into consulting is a slowdown in the industry's growth. Revenues are projected to increase by 20 percent annually, a hot pace that nonetheless represents a sharp decline from past performance. Some of that deceleration is caused by cyclical issues, such as turmoil in the global financial business--a major customer of India's outsourcers--and the weak dollar. But there are also signs of deeper challenges, including competition from other countries able to compete on cost, especially as wages in India are rising.

One way forward for India's tech giants is the development of new products and services--hence, the interest in Axon and a focus on the lucrative software development business. According to NASSCOM, the Indian technology trade group, "The next decade will play a crucial role in bringing about disruptive growth for the Indian software product segment."

But the industry has a long way to go before it can leave its relatively low-margin past behind. IT outsourcing ($23.1 billion) and business process outsourcing ($10.9 billion) still dwarf software and other products ($6.4 billion) in terms of current revenues for Indian companies.

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This article was originally published on 09-10-2008
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