Offshoring Growth to Continue for Some Time

Aug 31, 2006

Allen Bernard

As Indian companies continue to improve their services and keep costs low, American firms are increasing their use of these firm unabated.

This according to a recent IDC study, Worldwide and U.S. Offshore IT Services 2006–2010 Forecast. The global and U.S. markets for offshore IT services continue to grow at roughly 15% per year, with a total growth of 17% over the next five years, said Barry Rubenstein, program manager for Application Outsourcing and Offshore Services at IDC.

"In fact, the growth rates are quite astounding," he said. "If you look at the financial results of the major Indian players, you're seeing, year-over-year growth of 30% and it continues unabated."

Rubenstein and other analysts had predicted a slowdown in this growth by now but that is not happening. His latest slowdown forecast puts the current trend peaking in 2007-2008 sometime. But that is just a slowdown in growth, not market share.

"The biggest surprise is the growth is continuing at a rate that we did not expect going forward. We had certainly, earlier predicted a slowdown by now and it doesn't seem to be happening quite yet."

IDC predicts that offshore IT services vendors will capture $29.4 billion in worldwide customer spending by 2010, with little sign of a market slowdown. This represents about five-to-seven percent of all IT services work performed in the U.S.

The study also reveals a shift in the strategies of the major offshore vendors, with an increased focus on service offerings that build more operational and strategic relationships with their clients. The evolving and increasingly competitive landscape will require vendors to make significant investments in order to increase growth and achieve differentiation.

"In the end, not to deny the quality of work the Indian companies provide, because it is very high, the main motivation is still low cost," Rubenstein said. "And that's the bottom line and that will be the case for along time."

The study finds that the largest offshore vendors have begun to pose a serious threat to the top global players, as they strengthen their onshore presence, develop relationships higher up in the food chain within customer organizations, utilize new technologies, and invest in developing hosting infrastructures.

Problems still remain, however, with employee productivity and the revenue per headcount. There is also a lack of on-shore consulting presence, but overall the market for offshore IT services is quite robust, said Rubenstein.

The study cites additional vendor actions that have contributed to their impressive growth:

  • Signing larger contracts.
  • Expanding delivery capabilities beyond India and into China, Central and Eastern Europe, and Latin America.
  • Signing strategic partnerships with technology providers such as SAP and Microsoft.
  • Offering new services such as software testing.


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