As user organisations continue to grapple with the challenge of high attrition rates in internal IT departments, the Indian IT services market is pegged to grow to US $ 10.73 billion by 2011 at a five year compounded annual growth rate (CAGR) of 23.2 per cent, according to Gartner, Inc.

Key factors driving this growth are agility, growth, cost takeout and innovation. But a factor which is acting as a prime impetus for companies to consider external service providers (ESPs) is the continuous turnover rates of key IT staff in the range of 15 – 20 per cent.

"Growth of the IT services market is primarily being driven by economic growth, high growth among the small and midsize businesses (SMBs), government projects and increased customer focus. Many IT service providers, multinational companies (MNCs) and domestic have now recognised this potential and developed strategies exclusively for the domestic market," said Arup Roy, senior research analyst, Gartner. "Many IT organisations are planning to spin off their IT organisation into an independent entity to capture the growing opportunities," added Roy.

The market segments that are expected to witness the strongest growth are consulting, IT management and business process management (BPM) services with five year CAGRs of 28.1, 23.8 and 27.1 per cent, respectively. Consulting revenue, although coming from a small base, grew 30.1 percent to US $340 million in 2006 compared with 2005. As companies become more mature in their overall approach towards IT, it becomes more complex and sophisticated; they invariably have to rely on external providers to help them with consulting services. IT management revenue grew 27.3 per cent from 2005 to US $549 million in 2006. Increased adoption of remote infrastructure management services has driven the development of network operation centers / security operation centers, remote management centers and other managed service offerings from ESPs.

BPM in India is a high growth area that is moving beyond traditional customer relationship management (CRM) services. The primary challenges that are driving organisations to engage business process outsourcing (BPO) are cost, growth and business innovation. The primary objectives of BPO engagements are productivity improvements, process/business transformation, and cost-containment to improve profits.

Top three vendors, IBM, Tata Consultancy Services (TCS) and Wipro Infotech, together accounted for 26.1 per cent of IT services vendor market share in 2006. In 2006, IBM surpassed TCS to become the top vendor, taking 11.2 per cent market share. TCS and Wipro occupy the second and third positions with 10.9 and 4.1 percent market shares, respectively. However, the Indian IT services market is still fragmented, with the majority of the market being serviced by smaller local players that account for close to 40 per cent of the IT services market.

Commenting on the vendor landscape, Roy said, "As the market matures, competition will intensify and then lead to consolidation. Vendors that are unable to find a niche for themselves, or smaller vendors with no real differentiators will be acquired by larger, more-aggressive competitors. End user IT organisations or captive unit spin-offs will have a difficult time in competing with well-established providers unless they also find their own niche."