TREND WATCH: Outsourcing in 2007 and 2008

2007 has been a year of mixed fortunes for the Indian IT outsourcing industry both from a vendor’s and customer’s perspective. The industry witnessed the signing of mega deals on one hand and the unexpected US market slump on the other.

This article takes a quick look at the year 2007 and endeavours to outline expectations for 2008. The views are based on our experience in the outsourcing market, experiences of our clients and industry experts. A brief review of the year 2007 and what it offered to global IT outsourcing:

1. Accelerated pace of projects being outsurced to India
2. Product development companies showing good faith in outsourcing and building relationships based on business partnership.
3. Shorter duration of deals (less than two years). IT companies have shown less interest to be locked into long-term deals owing to the unstable economy in the US
4. Governance, data security, cultural fit with the services provider, and flexible delivery models have topped the list of partner evaluation criteria
5. Even though success reports are fewer compared to the failure stories IT companies have shown increased confidence in outsourcing to China.
6. Product companies have been setting their captives in India as an alternative to outsourcing. Several companies failed owing to their inability to scale the operations required for a captive
7. There was also a hint of back-shoring of projects. Few Product companies have back-shored parts of the project work onsite. However, the service provider continues to do the same work onsite
8. Testing services was a majority of the outsourced work

Overall 2007 has been a year of experimentation and learning for the outsourcing market.

What’s in stock for 2008?

Industry experts say that IT outsourcing is not over yet. Fewer flashy headlines about increasing trends and mega-deals signed indicate that fine tuning is certainly required. 2007 was a year of experimentation for both It Companies as well as service providers. While IT companies have experimented in the form of captives and multi-sourcing, service providers have done their share with flexible re-sourcing and business models.

We are fresh with the start of a new-year and right in the middle of the US economy slowdown and the falling dollar. However, there is light at the end of the tunnel for those who feel that 2008 is a repeat of the dot com bust. According to Gartner, the worldwide outsourcing spend is going to grow by 8% ,from $408 billion in 2007 to $ 441 billion in 2008,.

For Service Providers

1) Increase productivity and cut flab - Cost cutting by service providers is inevitable in 2008. increased productivity and cutting of flab is critically essential to stay competitive, cover exchange losses and prevent margins from weakening further

2) Diversify the customer base – Large service providers will diversify the customer base into Europe and /or concentrate on domestic markets to save themselves from the exchange rate losses and sudden attrition of the customers from the US. The off shoring business which is currently at ~66% from the US might reduce further

3) Flexibility becomes new outsourcing mantra – There is a greater chance of service providers aggressively targeting the un-served mid-market and the start-ups in the US. To accomplish this flexibility in terms of business models, resource allocation and execution is critical.

For IT Companies

1) Multi-sourcing – The new approach to IT out sourcing wil now be multi-sourcing. To spread their risks and address specific business objectives IT companies will increasingly look at partnering with two or more vendors over shorter durations as opposed to multi-year deals with one vendor.

2) SaaS – It might have been a buzz word a few years back, but it is now becoming a proven and viable option for many IT companies. By adopting SaaS, companies would minimize customization required for traditional products. this would in turn increase the sustenance of such products

3) Alternative Destinations – IT companies may want to experiment more with various destinations, such as China and Israel to explore alternative benefits that these countries may offer. Even though increasing cost and a dearth of skilled resources is affecting india’s position it is unlikely that China or Israel will outstrip India as the preferred outsourcing destination.

There are several other trends that will play a key role in outsourcing in the year 2008.

This slump in the Indian outsourcing scenario can be considered as the lull before the real peak and value of outsourcing is realized. It will encourage IT companies and service providers to re-think their IT and delivery strategies respectively.

It is high-time for the IT companies to look at the business value of their IT spend, understand and realize the value of the dollar that they are paying to service providers, be more committed to outsourcing and treat the service provider as a business partner rather than just a vendor.

Service provider will have to up the gear by contributing to the customer’s outsourcing strategy, understand and realize the value of money they are paying to their employees, increase operational efficiency, productivity and utilization rates.

While the year 2007 has been a year of experimentation, 2008 will be a year of correction. Companies (IT companies and service providers) that stick to the fundamentals of outsourcing and align their processes / activities to a common business goal are going to see through this phase and eventually succeed.