Battle of Mid-Sized IT companies

At a time when the big guns of Indian IT are tempering their business outlook, four companies from the midtier set are demonstrating performance and projecting confidence of the kind usually associated with an Infosys, TCS, Wipro or Cognizant. In a drifting stock market over the past year, when the benchmark BSE Sensex has dropped 8%, Infosys 17% and Wipro 14%, these four companies have delivered returns of between 20% and 87%.

Those stellar short-term returns delivered by Hexaware, MindTree, NIIT Technologies andZensar are backed by business performance, which, in turn, is being steadily shaped by a fundamental change in thinking. In varying degrees, these companies and some of their other peers, are morphing from being generalists to specialists.

It's a battle of intellectual capital now, not about labour arbitrage advantage to customer.

Generally  the large peers are beating these mid-sized companies when comes to pricing, as larger players seems to benefit from the operating efficiency and size. And more ever when comes to larger deals in generalist area, these mid-sized companies are not even invited for the bidding process.

Mid-tier IT companies-those with annual revenues of Rs 500-2,000 crore-have spent much of their existence aping the large players by offering a similar suite of low-end software services built on the foundation of labour arbitrage. But, with speedy growth and plum profitability eluding them, they are increasingly going from doing less in more areas to doing more in fewer areas.

In the process, such companies are changing the contours of the debate on whether the perennially underperforming mid-cap set can create a comfortable identity of its own, or whether it is resigned to remain trapped in its choices and drift along. They are going deeper in their chosen verticals, and building capabilities where revenue growth is not linked to adding employees. For instance,  MindTree has built capabilities in Bluetooth technology- short-range wireless that helps mobile phones interact with wireless ear-plugs. MindTree counts itself among the top five suppliers of this technology globally and has done 32 licensing deals.

Elsewhere, NIIT Technologies is offering software solutions for cargo handling and airline systems at airports. Its clients include the airports at Beijing, Hong Kong, Singapore and Taiwan. Hexaware, in 2008, re-organised its business along two major industry verticals, each managed as a standalone business: banking and financial services, and travel and transportation.

Much as specialisation gives traction and a unique positioning with clients, it can also be a barrier. It is an asset when the chosen area is doing well, but a liability in bad times. Specialisation also means a company is defining its playing field narrowly. "The more you specialise, the more you constrain your ability to scale.

In general, mid sized companies have lot of operating challenges, a below picture describes them. In such a challenging environment, its important to build a constant revenue stream and ability to build the business. This step of focusing on niche market and being specialized in some verticals and do well in them is what seems to be working, considering the market results.