The State of IT and BPO Offshoring

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    Yesterday, Wachovia's IT Services Research Team hosted an audiocast of a panel discussion featuring some smart people in the offshoring business: Greg Blount, the project director global services for TPI; Arup Gupta, the president of Tata Consultancy Services (TCS) North America; Atul Vashistha, the CEO of NeoIT; and Jeff Lande, the head of the software/services group of the trade group ITAA.

    The talk centered on what’s happening in the offshore — read: India — IT and BPO services industry. Here’s what I came away with:

    Price Pressures

    Prices for certain kinds of services are going up 5-15%. This isn’t happening on contract renewal or volume deals, said Mr. Gupta of TCS, rather on the value-add business, where the provider brings valued skills, such as knowledge of a particular high-end application (PeopleSoft or SAP work, for example). “The customer definitely sees a lot of value there and is willing to pay.”

    BPO Growth

    On the BPO front, with the exception of “voice” operations — call centers — “captive centers” are the modus operandi for many US and European companies. (A captive center is one in which the customer also owns the offshore provider.) What’s driving this are concerns about compliance and data privacy and security. But, as one participant pointed out, we seem to be holding Indian firms to a higher level of scrutiny than domestic firms. Will there be more spin-offs comparable to the GE spin-off taking place? Mr. Blount from TPI pointed out, “Captives have trouble being competitive on the cost side. There’s a huge transition point from providing services internally to providing them externally.”

    The Strength of the Market

    Deals are getting more numerous and larger. Mr. Blount said. The multi-nationals — IBM, CSC, etc. — are dominating these. He added that “a lot of offshore providers are having difficulty in competing in large engagements.” (By “larger” he means $50 million and up.) One of the reasons for that, pointed out Mr. Gupta, is that these are frequently deals in which employees are transferred to the service provider. Offshore providers have a tougher time managing that. TCS has succeeded where the numbers of employees involved are in the hundreds vs. the thousands.

    Indian firms are gaining strength. The share of business being won by Indian firms has increased from 5% of deals in 2002 to 14% of deals in 2004. Whereas the multi-nationals paid little attention five years ago to Indian providers, now they’re constantly looking over their shoulders.

    A lot of large organizations are trying outsourcing for the first time, but they’ve learned lessons from other companies. That’s driving them to take a “much broader strategic view more quickly,” as Mr. Blount said.

    Vendor Rationalization

    Changing vendors isn’t a common occurrence, according to Mr. Gupta. “Once you have an account, have established the governance model, there’s not much incentive on the part of the client to switch vendors.” Also, there’s a rationalization of vendors going on. Whereas in the past companies would deal with 60 or 70 vendors, “now they’re going with X number of tier one vendors, Y number of tier two vendors…” said Mr. Gupta. Tier two companies are doing well, said Mr. Vashistha of NeoIT, “where a client is offshoring a lot and they recognize the need for a segmented strategy — also, where the client believes in best of breed vs. the big-bang approach.”

    Europe

    “on Fire”

    The European market for outsourcing is “on fire,” as one panelist stated. “American companies have outsourced for years,” said Mr. Gupta. “They’re seeing the success. The industry has learned. The Indian vendors have matured, not just in application maintenance, security, multi-lingual — everything has been proven. It’s just a matter of time.”

    The Year of China

    China is coming along but won’t be an important market until 2008, according to Mr. Vashistha. “There are three kinds of activities happening in China. One is heavily directed towards Japan/S. Korea. The second for the domestic market. The third is window dressing — by the multi-nationals, and by the Indian players to show they have a presence. China has a unique chance to be the leader, especially in embedded systems. We don’t’ see maturity for US and Europe-based clients of their work until 2008.”

    Mr. Gupta said TCS’ China strategy addresses their customers that have a presence in China already. “We first started with objectives to provide services to US customers who have large operations in China and Eastern Europe. The second aspect: We have built a lot of software for stock exchanges, so it made sense for us to use that experience for specific segments of the Chinese market. From our side, we have a large number of global customers who have manufacturing faculties in China. We also see the Chinese market itself — the cost of operations are not much lower than in India — domain expertise, etc. we see the Chinese market as [having] potential, yes.”

    Bans on Offshoring

    New Jersey has just signed into law a “world-wide ban on state contracts.” Mr. Lande of ITAA said his organization expects that to expand to a few other states. “As of now, there’s some pressure in 20 states…though “we’ve been fairly successful in preventing that from happening.” He added, “The big wild card is on data privacy. We’ve had breaches with Lexis-Nexis, Visa. If one of those breaches happens with a foreign provider, then all bets are off…. If members of Congress are getting tremendous pressure because data was stolen or released by a foreign provider, they’re going to be much more motivated to cave… All politics are local.”

    Take-Aways

    A last note, from Mr. Vashistha of NeoIT: “I would suggest that [you] look at which [providers] are making a transition from staff augmentation to solutions. Look at the mix of that business. Keep a close eye on retention of staff and on the percentage of revenues that are coming form services that are commodity and services that are not.”

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