IT outsourcing in 2009

2009 will be a slow year for IT outsourcing, and companies will have to be innovative if they are to maintain growth.
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The overall outsourcing market globally is about $550 billion and India’s share of this is less than 10%. The Indian IT industry evidently has still a lot of room for growth. However, because of the slowdown, we do not expect 2009 to be a good year for IT outsourcing, and this has started to show.

At present, one of the major challenges faced by IT outsourcing business is the delayed decision-making across all industries due to the economic crisis. The tight capital market and credit squeeze is forcing companies to either cancel or delay their discretionary spending, leading to delays in IT outsourcing decisions. With the banking and financial sector (BFSI) taking a big hit, especially in North America, the Indian IT industry is facing the heat, as the BFSI segment is one of the largest revenue streams for IT service providers.

Effect of slowdown

The slowdown will lead to a longer decision cycle, and in this regard, the first and second quarters of 2009 will be tough for the IT outsourcing market. CIOs are under pressure to show business value proposition for their investments from IT. This has led to a major change in the way the industry traditionally looks at IT. From its traditional focus of reducing operational costs, companies are looking to IT to provide business value to support customer acquisition, increase the per-customer revenue and improve customer satisfaction.

Hari Murthy, Chief Sales and Marketing Officer, iGate, said, “With the financial stimulus packages being worked out by the transition team, we do anticipate that the Obama Government would take immediate steps that are far-reaching to pull US economy out of the recession as quickly as possible. We should be able to see the impact of these stimulus package showing positive results from the third quarter of 2009 onwards and companies slowly increasing their discretionary spend.”

He believed that the present economic situation also presents a positive side, that of a dramatic reduction in attrition. This is helping IT companies to improve productivity and better manage their delivery cycles and quality, which will eventually lead to higher customer satisfaction.

“It is a challenging time for outsourcing business. Due to the slowdown, customers are taking a longer time to make decisions—whether to outsource or not, and they are even negotiating contracts with the vendors. Nevertheless, our clients (99%) are renewing their contracts. I believe that by mid 2009, the business of outsourcing will improve. The domestic market will grow. It is a big opportunity for us. We will grow our India business and will try to do it differently. We are also focusing more on innovation and new strategies,” revealed Srikanth Sundararajan, Chief Operating Officer, Persistent Systems.”

Trends in outsourcing to India in 2009

One of the key trends that will gain acceptance in 2009 will be that of ‘outcome based pricing’ models as is evident with some of the recent large deals that have been signed. This is slowly becoming an accepted model where the complete processes, technology and the supporting infrastructure is being priced under a single scheme with unified SLAs. Bundling of processes along with the appropriate applications and with a single provider being asked to provide integrated solutions has led to many companies proposing platform-based solutions, SaaS models etc., for delivery. Moving away from traditional pricing models for outsourcing based on inputs i.e FTE or fixed price basis, to alternate price models that have a higher risk-reward initiative. The fourth trend is the growing ‘innovation’ agenda that is becoming a key differentiating factor that customers are seeing in their service provider. The ‘cost arbitrage’ Indian companies enjoyed is no longer a key factor with most large MNCs also setting up a global delivery model and with end-user companies automatically budgeting with global delivery model as the basis. Due to this, suppliers need to move to ‘enhanced value’ proposition. The Indian market is moving towards an era of outsourcing services in the domestic space at a faster rate. With the banking and financial segment—the mainstay of IT outsourcing—being in trouble, Indian companies are focusing more on other industry verticals like retail, manufacturing, healthcare etc., for growth.

What the future holds?

"It is a challenging time for the outsourcing business. Due to the slowdown, customers are taking a longer time to make decisions on whether to outsource or not, and they are even negotiating contracts with the vendors. I believe that the business of outsourcing will improve by mid 2009" - Srikanth Sundararajan Chief Operating Officer, Persistent Systems

"Many Indian companies have moved to high-end R&D and product development and are successfully competing in the global market place. By 2015, China will be first and India second in the global top five outsourcing destinations" - Hari Murthy Chief Sales and Marketing Officer, iGate

There will be an increase in high-end work focusing on innovation and R&D. Experts believe that technological power will shift from the West to the East as India and China emerge as big players in the global outsourcing market.

Murthy added, “This is already in transition, as companies like Microsoft, GE etc., have setup R&D units in India and China and are increasing their workforce in these two countries. Similarly, many companies are looking at benefiting from the intellectual capital and cost arbitrage that these two nations offer. Many Indian companies have moved to high-end R&D and product development and are successfully competing in the global market place. By 2015, China will be first and India second among global top five outsourcing destinations.”

While China will retain its top spot as the destination for manufacturing outsourcing, India will continue to maintain its lead as an IT/ITES/services outsourcing base. The IT industry will see roughly 10-15% of its jobs move overseas during the next 10 years, inviting more political debate. The concept of going overseas or offshoring is no longer relevant in the era of globalization. As companies expand globally, they will be forced to move their operations to locations that provide them competitive advantage.

With the banking and financial segment—the main stay of IT outsourcing—being in trouble, Indian companies are focusing more on other industry verticals like retail, manufacturing etc., for growth.

One of the biggest areas that one is seeing growth is healthcare outsourcing.

According to Sundararajan, 2009 will not be good for outsourcing and he thinks that it will grow by 20%; in 2008 it has grown by 30%. IT outsourcing would be tough for the BFSI, retail and manufacturing sectors, but pharma and engineering would be less affected.

He felt that rising costs and low efficiency in many cities like Bangalore would make software outsourcing less attractive in the future. He added, “IT companies have done a lot to grow the outsourcing business in India, but it is vital that the government should support this by providing proper infrastructure, transport, availability of power and other facilities. The government is collecting taxes but not doing much.”

“Cities like Bangalore will continue to have competitive advantage due to the infrastructure and eco system that has been developed. It will take some time before tier-II cities can match this infrastructure and ecosystem. We will continue to see a growth in these cities,” believed Murthy.

It remains to be seen how quickly the outsourcing market will recover. A lot depends on the speed with the US economy turns around.

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BY Vinita Gupta
Source：EXPRESS Computer