BANGALORE, INDIA: The top 3 of Indian IT industry – TCS, Wipro and Infosys – rule the Indian IT industry resulting in a growing divide between top league and other sub-billion firms, says a new study conducted by Forrester.

Forrester's latest take on "Developments in (Indian – MNC) IT Services Vendor Space" says that 46.6 percent of IT services export was locked in top 3. This dominance has resulted in huge operational benefits and higher profits, besides pushing the small companies to a struggle.

According to Sudin Apte, senior analyst, vendor polarization has tightened its grip further. This trend has made clients to assess their vendor's survival readiness and revisit their supplier selection.

The share of top 3 vendors in IT Services export has continued to grow at a steady rate. The top 3 companies had 26 percent share in IT services exports in 2004, 40 percent in 2007 and will have 46.4 percent share in 2008. The growth percentage, which was 14 percent for three years from 2004, has shot up to 6 percent a year from 2007.

While the top 3 Indian companies enjoy offshore vendor revenue of more than $4 billion, the next three top players Cognizant, Satyam and HCL Tech, have revenue of $1 billion, while the other important players had to be contend with less than $1 billion. The polarization has significantly mounted especially in the past two years, Apte observed.

Forrester's study also throws light into higher profitability enjoyed by the big league in Indian IT industry. Their revenue growth was 30 percent and profitability was at 20 percent. The top 3 increased their work force by 22 percent in FY 2008, resulting in incremental revenue per person added at $47,091. For the next 3, it was 36.6 percent and $ 35,411, while it was 19.3 percent and $29,278 in case of others.

The report further points out that most small and mid-size vendors are marginalized and plagued by low growth, while poor profitability typifies this segment. This has been demonstrated in the financial results of companies like Patni, which recorded flat revenue, and companies like NIIT, Polaris, and Mastek recorded single digit growth. Their profitability was at half rate as compared to top 3.

Despite clients all over the map, most small and mid-sized vendor in India lacks specialization. The companies have a high ADM concentration, poor vertical strategy and domain capability, as well as low ball pricing. Top offshore clients that leverage small companies offering services at low costs now question their value. New offshore adopters – like continental Europe – do not look at low cost companies as strategic options, except for a few services.

Most small and medium companies have largely demonstrated an inability to handle competition. The falling dollar, and drop in resource productivity have created a negative effect. These problems have left the small and medium players with not much financial resources to re-invest and they were struggling to grow with their current clients and unable to get into new, large relationships.

In contrast, the report says that the top league of IT companies have a clear strategy and differentiation. The top league has clear-cut plans and have taken up client ramp-up, besides having multiple service lines with over threshold volume and non-linear service delivery.

The top 3 now handle an average of 10 verticals and 15 horizontals with revenue of $4 billion, while the mid-size and small companies are handling an average of five verticals and eight horizontals earning a revenue of $ 250 million.

The top league earns per service line revenue of $100-$300 and enjoy operating margin of 40 percent. However, the mid-size and small companies get $ 10-25 million dollars per service line and get an operating margin of just 25 percent.