Exploiting gaps in the market caused by the global economic recession, mid-tier outsourcers have thrived in recent years by picking up contracts deemed too small and not lucrative enough by tier-one firms. Offering flexible, specialist services, these mid-tier vendors have targeted niche sectors in established and emerging markets to great success.
Hansa Iyengar, Forrester Research’s sourcing and vendor management analyst, explains how these firms have overcome a comparative lack of funds and publicity, and discusses whether they might one day reach a position where they can challenge the tier-one outsourcers.
Nearshore Americas: When did mid-tier outsourcers first begin to take on a more prominent role in the market?
Hansa Iyengar: This has been going on for some time. They really came into prominence around the time the recession was at its peak. That was a time when enterprises had a lot of problems in terms of their budgets becoming smaller. They didn’t have enough money to invest in IT and their engagement with the larger vendors had usually been in multi-million dollar deals (usually $100 million or above), lasting several years. At that time many enterprises were pretty uncertain about their future and they were not really willing to take a risk by committing so much money. The contracts they wanted were too small for the tier-one vendors, so the mid-tier guys began picking up the smaller deals and providing the same kind of service that you would expect from tier-one providers.
NSAM: What are the main strengths of mid-tier outsourcers in comparison with the tier-one firms?
HI: Many of these mid-tier firms are really keen to provide certain skills and they don’t mind engaging with enterprises in flexible pricing models. They are able to provide SMEs – who don’t have the money to hire tier-one outsourcers – with the kind of attention that they require, such as customized applications and solutions on a pay-per-use basis. Another advantage is that there’s also a constant push from big vendors to buy more services from them, to buy their platforms and their solution isolators and software – and this happens much less when you’re engaging with a mid-size vendor.
NSAM: Who are some of the most prominent mid-tier firms and what kind of customized services can they offer clients?
HI: One example is Persistent Systems, a small vendor from India. They started off as a product development partner for software companies like IBM, Microsoft, Cisco and Oracle, but they have now built up the expertise to enable their customers to double-up their own customer applications. For example, some customers want social and mobile apps but they can’t afford the solutions provided by larger companies. In this particular scenario, Persistent works with them and helps them develop cloud-based applications. This saves them money that would otherwise be spent on buying software licenses.
Another example is Birlasoft, who are doing a lot of wonderful work with both small and large enterprises. The benefit of dealing with them is that they provide immense flexibility in their pricing and delivery options.
If you look at other vendors like Mindtree, they have a wonderful set of offerings for mobility. Mindtree has niche skills in areas such as compliance and customer and risk management in banking. They also have proprietary solution accelerators and IP around areas like corporate lending, digital video surveillance, media planning and collaboration, testing, and mobile asset management that speed -up time-to-market.
There is another vendor called Torry Harris Business Solutions and they are top class in terms of service-orientated architecture (SOA) and middleware offerings, despite being a very small company. Their expertise lies around SOA and integration-centric projects, and the company is expanding this to include integration projects around cloud technology, big data and mobility.
These guys have a lot of private solutions in analytics and social media. They are the best of breed in their particular areas of operations. As a client who doesn’t want to spend a lot of money but wants to get top-class service, these are the vendors who make most sense for them, because they are able to provide everything from concepts to design, development and delivery, while keeping costs low and providing smaller clients with the kind of customized experience and personalized attention that is not really possible in small engagements with larger outsourcers.
NSAM: What are the main weaknesses of these mid-tier outsourcers?
HI: Size can be a disadvantage at times. Obviously they don’t have the size that you would expect from a larger vendor, but their size is suitable for the kind of engagement that they’re targeting. All of these vendors are very focused on what they do best – they don’t want to become a jack of all trades – they’d rather be known as the best at what they do. Another disadvantage is brand perception. Their brands are not very well known in the market, because they have revenue within the range of $100m to $500m and there is only so much they can spend on marketing. They rely more on word-of-mouth than aggressive marketing of their brand.
NSAM: Are there any risks that potential clients should be aware of?
HI: I wouldn’t say it is a major risk but a contingency plan is something that clients should consider just in case. It’s not a risk for all vendors, as many of them are pretty stable and some are part of larger conglomerates, but if there is an economic downturn then it could be that a larger company tries to make an acquisition.
NSAM: What kind of sectors are these mid-tier firms targeting in Latin America?
HI: Travel and transportation is big in Latin America. Then you have the natural resources business which involves a lot of logistics work. Publicity is another area they would target and the really big markets are telecommunications and banking.
NSAM: What makes them well suited to the Latin America market?
HI: Many of these firms have been around for 15 to 20 years so they have experience and they know the best practices. Many of them have done an extensive amount of work with smaller organizations in emerging markets in Africa, India and Southeast Asia, where you see a lot of technological leaps happening in terms of people skipping technological generations.
For example, the African continent has some of the most advanced mobile payment systems in the world. These kinds of payment systems eliminate the need for a bank account. The technology came about because of local necessities – many people do not have access to physical banks but they do have access to mobile phones so it made it easier for them to send and receive money on their mobile phones. This kind of mobile payment system doesn’t even exist in the U.S.
So, these vendors have experience in working in emerging markets and thinking out of the box to come up with innovative solutions. They have experience with the development and maintenance of large-scale applications. And they have the capabilities and the platforms to help decrease the time to market, which is hugely important in emerging markets like Latin America.
NSAM: What are the regions where these mid-tier outsourcers are having the most success?
They have done a lot of work in Africa, Southeast Asia – mainly in Malaysia, Thailand, Singapore – and the Indian subcontinent, and in some parts of Europe, such as the Nordic countries and Eastern Europe. And, of course, pretty much all of these vendors derive at least 40 to 50 percent of their revenue from the U.S. So they are familiar with global markets and the unique requirements that arise from the economic situation of the area they are operating in.
NSAM: Are there any regions where they have had difficulty entering the market?
HI: Japan. It is a very unique market where clients prefer to deal with other Japanese companies. This makes it a very tricky market to engage with, but there are certain vendors, like Persistant Systems, Birlasoft and Tech Mahindra, who have done some work in Japan.
NSAM: Which are the most prominent mid-tier outsourcers from Latin America and how do they compare to their Indian counterparts?
HI: Contax, Sonda, Neoris and TOTVS are among the typical Latin American companies of this size. One of the main differences is how long they’ve been operating. Most of the Indian firms have been around for at least a couple of decades and have much greater exposure, which is something that the Latin American vendors lack. They might work in Latin America, Spain, Portugal and the U.S., but they don’t have the same experience or exposure in regions like the Middle East, Africa and Southeast Asia.
NSAM: Will mid-tier outsourcers continue to take on a more prominent role in the market?
HI: They will definitely continue to grow and I do see mid-size vendors playing a significant role, however the tier-ones will definitely continue to dominate because of the kind of engagement they have and the kind of client relationships they have with extremely large enterprises, including many from the Fortune 500.
One interesting case is that of Cognizant Technology Solutions, which was once considered a mid-size vendor. Ten years ago they were pretty small, with $300m to $350m in revenue but look at them now: they are one of the biggest outsourcers around. So there could be a handful of these mid-size vendors who challenge the tier-ones, but there is a lot of work for them to do and it will take them some time to get there.