It’s Time to Talk Cloud Ten

The

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

the race.

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

outsourcing market.

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

application development.

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.