- log in
Posted by Gene Cao on August 24, 2012
Gene Cao, Frederic Giron, Michael Barnes
On August 10, rival IT outsourcers hiSoft and VanceInfo announced their intention to merge. The resulting entity will comprise a much bigger organization, with more than 20,000 employees mainly located in China, making it one of the largest IT services vendors in the country. In another recent example of market consolidation, BeyondSoft announced on August 18 that it would acquire six Chinese and Japanese subsidiaries of Achievo, a US-based offshore IT services provider.
Over the next 18 months, we believe that IT services vendors in China will face increasing price and margin pressure driven by rapidly increasing local labor costs. The days of relying on low labor costs to drive business in the US, Europe, and Japan are numbered. Chinese IT services vendors are being forced to evolve from a cost-based to a business value-based approach. As a result, we expect the Chinese IT services market to consolidate over the next 18 to 24 months as vendors seek ways to improve their organizational and operational maturity.
The challenges hiSoft and VanceInfo will face after the merger are indicative of broader market pressures, including:
- An increased capacity to better compete in large deals. As separate entities, hiSoft and VanceInfo both faced significant challenges when bidding on large-scale outsourcing projects with a total contract value of more than $50 million. With this merger, we expect the newly formed organization to gain better access to these deals as they become more visible to MNCs. However, the new company will still be small by Indian offshore standards.
- Improved operational efficiencies to increase profit margins. We expect that the newly formed organization will improve its profit rate by 2% to 3% over the next 12 months. Of course, this assumes that they are able to successfully integrate in key areas like consolidating office locations where applicable, optimizing delivery teams, and reducing labor management costs that are critical for long-term success. Both companies’ current profit levels are approximately 12%, which remains far below the levels of their Indian counterparts, which typically exceed 20%.
- Broader geographical coverage. VanceInfo has primarily focused on domestic customers like Huawei, which contributed more than 20% of the company’s total FY 2011 revenues. In contrast, hiSoft is primarily an offshore provider, with the majority of its revenues coming from the US. The company also has a footprint in Japan. This deal will result in a more balanced geographic coverage between the US, Europe, and Asia.
The trend toward increased consolidation, combined with an increasing focus on value delivery among the resulting larger entities, are both critical steps in the maturation of the Chinese IT services industry, which is currently far too fragmented and cost-focused. Moving forward, we also expect global services vendors to increasingly look at acquiring Chinese players as part of their inorganic growth strategies.
Search Forrester's Blogs
The dynamics that will shape the future in the age of the customer »
Planning for innovation and risk in the wake of Brexit »
Forrester's CX Index
Predict how actions to improve CX will affect revenue performance.
Measure the customer experiences that matter most »
- Brad Bortner (7)
- Brandon Purcell (7)
- Carlton Doty (20)
- Cinny Little (9)
- Emily Collins (20)
- Fatemeh Khatibloo (36)
- Gene Cao (19)
- James McCormick (9)
- Jennifer Belissent, Ph.D. (16)
- Joe Stanhope (35)
- Kristopher Arcand (2)
- Lori Wizdo (2)
- Marc Jacobson (1)
- Michael Barnes (9)
- Rob Brosnan (19)
- Rusty Warner (17)
- Srividya Sridharan (18)
- Tina Moffett (17)