India's IT services market is forecast to grow to $10.73 billion by 2011, at a five-year compound annual growth rate of 23.2%, as outsourcing emerges as a more favored option for companies in India, according to research firm Gartner.

As companies are finding it more difficult to hire and retain staff in their IT departments, they are looking at external service providers as an option, hoping to also cut down costs, and better manage growth in the process, Gartner said Tuesday.

Indian user companies compete for staff with Indian outsourcing companies and Indian operations of multinational companies, which hire new staff by the thousands each quarter.

Staff attrition is however not the key reason why companies are outsourcing, said Arun Gupta, chief technology officer, at Shopper's Stop, a top Indian retail chain. Driving outsourcing in India is a growing demand for new technologies and applications. Shopper's Stop has six IT projects in progress with another 12 projects planned for the next six to 12 months.

Rather than creating and managing a large IT organization in house, the company is working with service partners to support its 45 IT staff, Gupta said. Some of the functions it outsources are network maintenance, desktop and server maintenance, monitoring  ERP applications, and software development, he added.

A number of large banks and telecommunications service providers are already outsourcing key IT operations, though the key winners so far have been multinational services companies. Many Indian outsourcing companies had neglected the Indian market in favor of exports, according to a survey last year by Gartner. But that may be changing as the weakening dollar puts pressure on rupee realization from exports.

IBM, Tata Consultancy Services (TCS) and Wipro together accounted for 26.1% of IT services vendor market share in India last year, according to Gartner. IBM was the top vendor, with 11.2% market share. TCS and Wipro occupy the second and third positions with 10.9% and 4.1% market shares, respectively.

However, the Indian IT services market is still fragmented, with the majority of the market being serviced by smaller local players that account for close to 40% of the IT services market, according to Gartner.

The IDG News Service is a Network World affiliate.