Offshoring is Becoming the Key to Making Money in IT Services

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    A new study titled, “Is Offshoring Demand Sustainable?” by Bernstein Research and Everest Research Institute (both of whom sport truly minimalist Web sites and don’t appear to mention the study anywhere on their sites) suggests that although offshore outsourcing represented a mere 3% of the $725 billion spent on global IT services in 2004, it’s also driving the growth and profitability among the largest service providers.

    As a press release here explains, the two research firms divvied up the major IT service providers into three groups, based on their level of offshore adoption:

    • Indian pure plays, such as Wipro, Infosys and Cognizant, for which the majority of employees are located offshore.
    • Aggressive offshore adopters, such as Sapient, Perot, and ACS, which have been relatively early adopters of offshore labor.
    • Traditional suppliers, such as IBM Global Services, EDS and CSC, with a comparatively small, though growing, percentage of their work staffed in offshore locations.

    Research uncovered some interesting data:

    • In 2004, the net margins of the top six Indian “pure plays” averaged 22% vs. 4% for the six largest traditional providers.
    • The pure plays enjoy higher cash flow. The top six combined generated nearly $1 billion in the past year, which is “essentially equal” to the aggregate cash flow of the six traditional providers.
    • The pure plays are growing fast. Revenues for the top Indian suppliers are growing about 40% annually vs. 3% for the traditional providers.

    The report suggests that 30% growth in offshore outsourcing demand is sustainable for the next three years.

    This means we can expect to see more traditional providers ramping up business quickly in India by acquiring providers there as well as consolidation taking place among Indian providers with cash at hand for acquisitions.

    As examples that I’m aware of, US-based Ciber recently said it will be acquiring Bangalore-based Knowledge Systems Pvt., Ltd., which will “more than double” Ciber’s current offshore capabilities and size.

    Oracle said it plans to acquire Bangalore-based PeopleSoft development centers operated by Hexaware Technologies and Covansys Corp.

    Covansys Corp. said its subsidiary Covansys India Ltd. will be acquiring up to 75% of the stock in Fortune Infotech Ltd., which is being funded with cash from its India operations.

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