Outsourcing Shifts

Various sources report outsourcing deals are taking longer to close and that new projects are slowing. Nonetheless, TPI, a unit of Information Services Group, Inc., reports a 10 year high in number of outsourcing contracts, total contract value (TCV), and annualized contract value (ACV) for 1H08. In other news, a newly released Everest Research Institute report cites India as the most matured location for offshored business process outsourcing (BPO) and IT services.

Focal Points:

• According to a number of industry sources, the global economic downturn has business executives delaying decisions on IT outsourcing projects. TPI states that companies are primarily cutting application development projects and not other types of outsourcing. In addition, the average outsourcing contract length has shrunk to five years from seven. According to Everest Research Institute, Europe made 36 per cent of the outsourcing transactions in the first quarter of 2008 while the financial sector contributed to 14 per cent of the transactions signed during the same period.
• TPI reported 1H08 closed as one of the strongest first halves in more than a decade. This is attributed to 282 contracts valued at nearly $49 billion in TCV, and nearly $10 billion in ACV that were awarded in the first half of 2008. This yielded a brisk year-over-year increase of 24 percent for TCV growth and 36 percent in ACV growth. Another major factor contributing to the first-half's record performance was the high number of truly new (versus restructured) contract awards. New scope awards increased in TCV and ACV at roughly 26 percent and 43 percent respectively – the greatest year-over-year increase in the past four years. At this rate TCV is on a path to eclipse the 2004 TCV record, which has been the strongest performing year to date. The major growth area for these contracts was from the Europe, Middle East, and Africa (EMEA) region, which experienced a 58 percent TCV growth rate.
• Everest Research Institute found that despite the challenge from rising costs, India has emerged as the most matured location for offshored BPO and IT services. According to its report on global sourcing, the cost inflation in Indian cities is exceeding the 2007 levels and this has increased the risk of labor arbitrage closing very rapidly. India has experienced a constant threat from locations such as China, Philippines and Eastern Europe, which are challenging its dominance. But any immediate threat to India is unlikely as the country has a vast pool of talent when compared to the other nations. In addition, the other competing locations such as Argentina, Brazil and Mexico are seeing some of the pressures of their own. In Brazil, its currency, the Real, has been appreciating and it has reduced its arbitrage advantage. In Mexico, where major Indian companies like Infosys Technologies Ltd., Wipro Ltd., and even MindTree Ltd. are setting up their development centers in Monterrey, might see some pressure on expansion due to labor pool pressures. New locations that are emerging as offshoring destinations are the Dominican Republic, El Salvador, Honduras, Paraguay, Thailand, and Uruguay, the report said.

Experton Group believes the global economic slowdown and the credit crisis will create a strong impetus for offshore outsourcing. Enterprises will use offshoring as a tactical approach to cost and personnel containment, while still pursuing required project investments. IT executives should carefully evaluate the tradeoffs of tactical outsourcing solutions, take appropriate actions, or be prepared to defend in-sourcing to corporate management before being preempted.