offshore outsourcing model was first successful in India, and therefore, it
wouldn’t be wrong to call India the birthplace of offshore outsourcing. Indian
companies have provided application development services to overseas firms for
more than a decade. In addition to a vast pool of talent and fluency in the
English language, India has two other traits that are needed to be a successful
offshore region–rapidly-growing infrastructure, and a proven experience of
doing business with Western companies.
India’s popularity as an offshore region of choice has grown in recent
years. Between 1998 and 1999, the number of IT projects sent by companies based
in the United States to India grew by almost 60%. With such strong demand for
Indian IT services expected to continue, the IT services market has become a
major driver for India’s present and future economic growth.
Recognizing the tremendous value of this market, India is working to maintain
its status as a dominant offshore region. To that extent, the Indian government
has shown strong support for the software industry, encouraging advances in
software development through tax breaks for companies and educational incentives
for students and IT workers.
Others are emerging stronger
Although it is by far the most dominant region in the offshore outsourcing
market, India is not alone in the provision of offshore IT services to US-based
firms. A number of other emerging offshore regions, including Canada, Mexico and
the Caribbean (both are as ‘nearshore’ regions due to their proximity to the
United States), South Africa, Israel, Ireland and Eastern Europe, are also in
Each of these emerging regions has the potential to develop into a lucrative
offshore outsourcing market. But so far, only India has the four characteristics
required of a successful offshore region–fluency in the English language, a
vast pool of IT talent, solid infrastructure and experience of doing business
with Western companies.
Talking to users of offshore outsourcing, India is clearly the region of
choice, though Mexico, Russia and Ireland are also emerging as preferred
destinations. Most customers are currently satisfied with their offshore
providers and are not looking to establish relationships with firms in other
regions or countries. This finding emphasizes the importance of
established successful relationships between vendors and end users in the
As is often the case in outsourcing engagements, an end-user with a
successful current or prior relationship with an outsourcing vendor is likely to
award new projects to the same vendor without putting the projects out for
competitive bids. In the offshore outsourcing market, end-users with successful
offshore relationships are likely to continue using the same offshore providers
for additional projects.
Those companies that have opened global offices staffed with their own
personnel–the global operations model of offshore outsourcing–are more
likely to look beyond India to meet their offshore needs. For example,
PriceWaterhouseCoopers has an office in India and is looking to expand
operations in India and in Eastern Europe. Companies leveraging the global
operations model of offshore outsourcing may be primarily attracted by the
significant cost savings in regions such as Eastern Europe.
Of contracts and services
Offshore outsourcing contracts are typically lower in value and shorter in
length than broader IT outsourcing engagements. Whereas the typical
infrastructure support deal will range in length from five to ten years,
offshore outsourcing contracts average one year in length.
The legacy of application development services in the offshore model remains
strong. A majority of the IT projects sent offshore in 2000 included application
development services, including traditional mainframe-based application
development, e-commerce-based application development, and enterprise platform
It is important to keep in mind that the end-user here comprises large,
high-technology companies. These companies are currently sending a great deal of
application development work offshore, but expect their offshore portfolios to
expand beyond application development over the next five years.
Application development services will continue to account for a majority of
spending on offshore IT services. However, with the proliferation of Internet
and wireless expertise among offshore firms, one does expect to see a shift in
the mix of IT projects sent offshore over the next few years.
Future of offshore outsourcing
In a validation of the offshore model, current end-users of offshore
outsourcing services plan to continue their use of offshore IT service firms in
the near future. Users responded that their offshore outsourcing needs will
change. In addition to application development work, current end users plan to
outsource other services, including remote network management and customer care
and help desk functions (e.g. expansion to Web-based chat).
Cost-savings are the primary driver of offshore outsourcing. However,
cost-savings are difficult to quantify. Offshore outsourcing users estimate
savings of 20-40% of a project’s total cost. Exact estimates vary, from 30-40%
of the total outsourcing budget of a firm to 40% of the total labor costs on all
outsourced projects done offshore.
Ishan Ranjan is VP, projects, CMIL.