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Wake-up call for Indian BPO/ITES Companies

Players in the services and maintenance sector in India, who have hitherto had the field pretty much to themselves, would soon face challenges from U.S., Europe and Japan-based product companies who were seeing their market shrink — and were reinventing themselves to bite into the services pie

The product revenues of American IT companies are shrinking relative to their services’ revenues. For example, with the commoditization of Siebel’s CRM products, the Oracle subsidiary’s products revenue has dropped; at the same time its services revenue has been stable. The same trend has applied to Oracle and PeopleSoft.

Firms that combine products and services are in Michael A. Cusumano, a Distinguished Professor of Management at the MIT Sloan School of Management, term, hybrid companies. “Hybrid companies have higher market valuation, and higher and more stable profits than product companies,” he says.

The sensible way forward for Indian business process outsourcing (BPO) and IT-enabled services (ITeS) players, he suggested, was to go `hybrid': to attempt a canny mix of pure services and innovative product offerings within the same space.

But to be able to thrive these companies will have to innovate. “You will still need to generate products to be able to service them. This will need investment in R&D,” says Cusumano. However, smaller companies are likely to lose out because they will not have the resources to spend on innovation.

At Nasscom 2006, Cusumano advised Indian services companies to follow an approach to differentiate their services. “To outsiders all Indian companies look alike except for their different sizes and price structures. So, companies must differentiate themselves.” This differentiation will be in areas such as services research and development, recruitment, knowledge management and management leadership.

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