January 14, 2006

Can offshore outsourcers end reign of Big Six?

Found this article on cnet.com on the trend in IT outsourcing industry in the near term

Almost $100 billion in outsourcing contracts will be up for grabs in the next two years, and big players including Accenture, Electronic Data Systems and IBM could feel their grip on the market weaken due to more competition from offshore companies.

My personal view point is that indian IT services companies like infosys, wipro etc will continue to gain market share and will show high growth for the next few years. Will the profit margin hold at the current levels. I think odds are against it. With the kind wage pressures already being felt and with dollar / foreign currency risks etc, I think the odds are that margin would come down over a period of time. More likely that the margins would drop by a few points every year till stabilise at 8-10 % (or maybe a bit higher). The key variable would how long will this take ? frankly I don’t have an idea. But I think it would be key variable for the current valuations to hold. If the slide is fast, then it would be difficult for the current valuations to hold up.

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