New challenges for offshore companies

The growing use of offshore outsourcing will place strains on service providers in the years ahead as they fight to keep up with demand and face new competition, predicts Giga Information Group.

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By  Neil Denslow Published  March 3, 2003

The growing use of offshore outsourcing will place strains on service providers in the years ahead as they fight to keep up with demand and face new competition, predicts Giga Information Group.

“Businesses need to understand the latest trends in global outsourcing to get the most business value from these relationships,” says Giga’s vice president Stephanie Moore.

“Companies should not rush into offshore or nearshore outsourcing relationships without first understanding how to approach the endeavor. Global outsourcing is a complex undertaking that requires significant investment in knowledge acquisition and program management,” she adds.

The key driver for outsourcing work offshore remain the need for companies to reduce costs and remain competitive. Along side this, companies are also looking to improve the quality of their software maintenance and development efforts.

Furthermore, the offshore industry is growing through increased acceptance and understanding of the value it offers in terms of cost, quality and time to market. Increased awareness among Global 1000 firms is particularly important in this regard.

Offshore service providers have also improved. Firstly they have mitigated the risks associated with offshore outsourcing relationships. These companies are also beginning to mature and now have legitimate customer references to support their value and safety propositions.

However, this multitude of drivers will increase competition in the sector, and put pressure on the established leaders.

“India’s offshore industry will undergo a crisis during the next two years as IGS, Accenture and other global players attain quality/cost ratios similar to those achieved by TCS, Wipro, et al,” predicts Giga research fellow, Will Cappelli.

“Business process outsourcing is no salvation here, because the global players will, of course, deliver that too. At the same time, as these ratios become the norm throughout the industry, the case for maintaining inhouse IT operations becomes ever more tenuous,” he adds.

Indeed, Giga predicts that US-based outsourcing firms, such as IBM, CSC and EDS, will soon be able to undercut Indian vendors’ offshore prices. Furthermore, it adds that companies that are too dependent on one country’s labor pool will increasingly look to diversify their risk.

However, Giga adds that the large top-tier outsourcing firms will continue to thrive and many will match or exceed industry growth rates, while the smaller, newer Indian vendors will struggle.

The industry may also increasingly use the term ‘co-sourcing’ instead of outsourcing, although this may amount to little more than a euphemism.

“Although the term co-sourcing has seen increasing use there appears to be no significant difference between outsourcing and co-sourcing,” says Giga’s industry analyst, Robert McNeil.

“The principal reason the term is being used is that it resonates well with end users who want to partner with service providers but have become indifferent to outsourcing, or end users who find it hard to internally sell outsourcing,” he explains.

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