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Indian firms winning offshore game

Merrill Lynch survey predicts India-based IT providers will gain market share when it comes to spending in India – while Western firms with Indian operations will lose share.

U.S. information technology companies have taken a "if you can't beat them, join them" approach to competing with India-based tech firms. But the Western firms still seem to be losing, according to a new report from Merrill Lynch.

Although companies such as IBM and Electronic Data Systems have been bulking up their Indian operations to offer customers low-cost offshore outsourcing projects, Indian vendors like Infosys Technologies and Tata Consultancy Services appear to have the upper hand. Merrill Lynch on Thursday published a survey of U.S.-based chief information officers finding that India-based companies snag a larger share of spending earmarked for India, and their lead is likely to grow.

The portion of India-based spending expected to go to India-based vendors should rise from 52 percent last year to 54 percent by 2006. By contrast, the share of that India-focused spending expected to go to an Indian arm of a Western system integrator is expected to slip from 32 percent to 31 percent. The chunk of Indian spending allocated to a "captive unit" – an internal unit of the CIO's firm in India – is likewise expected to fall, from 16 percent to 15 percent.

What's the secret to success for the Indian tech companies? Perhaps ironically, their bright future seems to have something to do with them becoming more like soup-to-nuts Western tech services companies – by offering services beyond the software development and maintenance tasks on which they've largely focused. Merrill Lynch said it believes the budget shift to Indian firms will happen "with increased acceptance of India-based vendors and an expansion in the breadth of services offered by the India-based vendors."