New generation of outsourcers rises in India

The southern Indian city of Bangalore is widely known as the world's outsourcing capital, a global IT hub where the likes of Infosys and WIPRO pioneered offshore software development.

But now a newer generation of Indian businesses are beating the city's more established players at their own game - while the fastest-growing among them isn't based in India at all.

Earlier this month Cognizant Technology Solutions - which is headquartered in New Jersey, although most of its operations are in India - posted results that again exceeded estimates, confirming its rising status in India's $100bn IT sector.

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While many competitors struggle as clients in recession-hit North America and Europe trim spending, the Nasdaq-listed group promised revenue growth of 23 per cent this year, more than twice the sectoral average.

And with revenues of $1.9bn between July and September the company, which was spun off from US business data provider Dun & Bradstreet in the mid-1990s, surpassed Infosys for the second consecutive quarter, putting it on course to become the country's second-largest IT exporter by revenue in 2013.

On the surface Cognizant provides much the same services as its rivals, winning more than half of its income helping large businesses develop and use heavy-duty software applications, often made by the likes of Oracle or SAP.

But Francisco D'Souza, the group's 43-year-old chief executive, says Cognizant's success also stems from a decision to focus resources on fewer sectors.

"We have consciously chosen to serve a small number of clients, meaning our footprint is narrow and very deep," he says, noting that the company earns around two-thirds of its income from work in just two sectors, financial services and healthcare.

Analysts say it also benefits from a second factor: good salespeople. IT outsourcers need to excel both at "hunting" for business and "farming" existing clients for new projects, says Ankur Rudra, an IT analyst at Ambit, a Mumbai-based brokerage.

Cognizant has been particularly good at both, in part because it targets profit margins of just 20 per cent - a lower level than rivals like Infosys, but one that allows its management to offer sweeteners that tempt clients to outsource more business.

Crucially, the company, in common with other faster-growing outsourcers like India's HCL Technologies and US-based Accenture, has also been able to combine the various IT services it offers into more flexible packages, which appeals to cost-conscious blue-chip clients.

"Cognizant is trying to do something different", says one senior IT specialist at a global company familiar with the major Indian groups. "With most of them it is like dealing with an army. They save you money by offering standardised bits of kit at huge scale, but they aren't good at customising . . . Cognizant doesn't have that same command and control mentality."

Even so, the company admits luck has also played a part in its rise: demand from its big healthcare and finance clients has held up despite weak growth in North America, while only around 5 per cent of revenues come from Europe, making it less vulnerable to the eurozone slowdown than rivals such as Tata Consultancy Services, India's leading IT group by sales.

Mr D'Souza says the challenge now is to ensure growth in other parts of the world, and that is why he is scouting for acquisitions in both France and Germany, while establishing offices in Asia and Latin America - emerging markets where India's outsourcers are yet to have much success.

At the same time he and others in the industry also face increasingly stiff competition from a new generation of companies, like Salesforce.com, which use the internet to make outsourcing ever cheaper and more flexible.

"The whole industry is going to come under threat with the rise of 'software as a service' online," says Vineet Nayer, chief executive of HCL Technologies. "All of the Indian companies want to be the first to turn what we do into a utility model, where people pay just for what they need."

Is Cognizant in time planning to overhaul TCS, and perhaps even threaten IBM, the world's largest IT services group? Mr D'Souza demurs, saying he tries to avoid talk of league tables. "Globally this industry is still very fragmented, " he says, with plenty of room for everyone to expand.

"What you'll get is organic revenue growth that is higher than our key competitors," he says. It is a pledge that has Bangalore's outsourcers on notice.