By Roshni Menon and Raja Rajeshwari, CNBC-TV18

It's going to be tough times for the Indian IT industry. According to analysts, the HP-EDS deal comes as a wake-up call for the Indian IT sector. Armed with the service capability and the data centers of EDS, HP can now aim for mega outsourcing deals, which is something that Indian IT firms have just got a taste of. IT firms are now adopting a wait and watch policy.

“We had the same apprehensions when IBM and Accenture came in. We lived through that; we will get through this one too,” said V Srinivas, CFO, Satyam.

Incumbents like IBM and Accenture have been ramping up offshore centers especially in India. But Indian IT companies have been taking on competition by scaling up to consulting, product platforms and infrastructure management. The one thing that would play out positively for Indian IT players is the increasing trend towards smaller deals.

According to research firm Forrester, “ While it's true that mega-deals are becoming a smaller portion of outsourcing deals, the reality remains that HP must be larger to compete more effectively for that market segment.”

TPI data too indicates that the trend towards smaller deals in the US has been gathering momentum in the last two years. The average contract value of deals above USD 50 million has fallen sharply from USD 226 million in 2005 to below USD 150 million in 2007.

The big IT corporations are betting on experiments with consulting and infrastructure management services to pay off. But tier II players may well feel the heat with the rising scale of larger vendors. What is left to see is whether the smaller players will be able to match up to scale with expertise in niche markets.