Customers prefer offshoring to multiple locations

Customers are increasingly opting to outsource to multiple offshore locations, according to sourcing consultancy firm Technology Partners International Inc. (TPI) of Houston, Texas.

Customers want to avoid “concentration of risk” in one location, and this trend is being driven mainly by the financial services industry, Dennis McGuire, chairman of TPI, told reporters in Bangalore on Tuesday.

Typically customers outsource first to India, and then, after three to five years of experience in offshore outsourcing, decide to diversify to other locations like Eastern Europe, said Paul Schmidt, a partner at TPI.

This strategy gives multinational services companies an advantage because they already have the capability to offer services from multiple locations, according to Schmidt. To stay competitive, Indian outsourcers have to continue to expand beyond India to other locations in Europe and Asia, he added.

The odds are against Indian companies bagging large outsourcing orders, because of their smaller size in comparison to multinational services providers, said McGuire. Customers are hesitant to spend a majority of their IT budget on an IT services supplier in India whose revenue may be about twice that budget, he added.

For example, although Indian outsourcing companies got a share of a €1.8 billion (US$2.18 billion), five-year outsourcing contract last year from ABN AMRO Bank NV of Amsterdam, the largest part of the contract went to IBM Corp. of Armonk, New York for IT infrastructure services, McGuire said.

Another issue is that Indian outsourcers do not offer all the services customers require , McGuire added.

The number of IT services and business process outsourcing (BPO) contracts awarded last year was the highest ever, but the total value of these contracts has not grown, TPI said in its quarterly report of the global outsourcing industry.

Last year, 293 contracts were awarded, up from 269 contracts in the previous year, Schmidt said. However, the total value of the contracts dipped by US$3.6 billion to $74.9 billion last year.

The growth rate in the value of IT outsourcing contracts is slowing. In fact, instead of growing, the value may shrink by 3 to 5 percent in this sector this year, according to TPI. A larger offshore component in the contracts is driving down their value, Schmidt said. In contrast, revenue from BPO contracts is expected to grow by 10 to 15 percent this year.

The study by TPI covers contracts of a value equal to or more than $50 million.