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	Analysis of Outsourcing Trends

IT outsourcing – Industry review

Is the IT outsourcing trend losing its steam? Given the mixed signals sent out by the Indian IT majors in their latest quarter one would most certainly think so. However, rather than a reversal in the offshoring trend the latest results should be viewed more as an aberration owing to temporary scaling down of IT outsourcing by clients . Given the high dependence on the top 10 clients for revenues, the impact was immediately felt by the IT majors.

While this temporary blip is minor, its impact has forced companies to review their overall IT outsourcing roadmap.

The global offshore IT outsourcing industry has undergone a massive transition over the previous year. While the total contract value of the outsourced deals has remained quite constant there has been significant industry realignment and certain prominent trends emerging in the market place.

Of all the trends prevailing in the market place perhaps the greatest impact has been felt by the Big six consulting companies who have seen their market share take a big hit. Of the top 100 contracts awarded in 2003, the Big six saw their share of the pie come down from 68% in 2003 to about 52% in 2004. The loss of market share is more obvious in the case of smaller contracts. In 2004 the share of the big six in industry wide contracts with value over $50 Million have come down to 44% as against 71% in the previous year

Another trend that can be observed with respect to the outsourcing industry is that the contract values have also been steadily decreasing and there is today lesser number of mega deals than earlier. This trend in particular could play to the advantage of Indian vendors since mega deals were almost always the bastion of the big six and now they have a good opportunity to bid for a bigger chunk of the pie. Indian vendors particularly the big ones do have significant number of customers in the $20+ million range which has given them a feel for handling large accounts.

Along with the average contract values, the average duration of the contracts have also increased. This trend is more pronounced in the case of BPO contracts where the average length of the contract is seven years as against six years in the case of IT services. Another trend is that of customers preferring integrated outsourcing deals where the vendor provides the entire suite of BPO and IT outsourcing services to the client.

In their drive to differentiate and provide enhanced value offerings to their clients, Indian companies have been quick to diversify into newer and hereto unexplored service lines. They have also been on the look out for suitable candidates for acquisitions for augmenting their service delivery capabilities and offerings. Companies have been establishing specialized practices for services such as testing, Infrastructure management and consulting.

Moving over to revenues by geography, Europe has been fast emerging as an increasingly attractive market for outsourced services. The total contract value of industry wide contracts greater than $50Million has been growing at a compounded rate of 20% for Europe whereas the same has been declining by around 17% annually for North America. Europe accounted for close to 49% of all the industry wide contracts of value in excess of $50 Million in 2004 as compared to only 41% in 2003. The share of the Americas in sharp contrast has come down to 44% in 2004 as opposed to 54% in 2003.