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August 2010 | Outsourcing Blog | BPO Industry Updates and Articles

IT Offshoring Losing Pace


Sunday, August 15, 2010 | Comments (0)

Category: Outsourcing Research / Trends

Offshore Outsourcing Losing Traction?

A new survey by Everest Research indicates that global IT outsourcing and offshoring may not quite be at full recovery yet.  The study showed that after a growth spike in the fourth quarter, the pace of global outsourcing has been slipping.

The quarterly survey by Everest Research uncovered a contraction in the value of new IT outsourcing and offshoring contracts, having returned to their normal pace in June after experiencing a growth peak in the previous quarter. The total value of new IT outsourcing deals is down from $2.8 billion in the March quarter to $1.5 billion in June. 

Despite performing weaker than expected, analysts believe that the signing of new deals is perceived as a positive forecast to revenue growth in the remaining quarters. Last quarter’s performance saw some of the highest rates in terms of new contract addition which was followed by a healthy performance in June.

The survey reveals a declining value for purely IT contracts having gone down 46%. A 25% decline can be seen even when comparing this year’s performance to the same quarter last year in which the recession was reaching its heights.  At the time, the value of global IT outsourcing and offshoring contracts was at $2 billion and dipped to just $1.3 billion in the December quarter.

Although India accounts for 60-65% of the global IT outsourcing market share, the study indicates that the decline was owed to a large extent to the depreciation of European IT and BPO (business process outsourcing) deals. The total value fell 41% during the June quarter compared to the same period last year.  Rounding the top 8 firms with the most number of deals signed last quarter are Infosys, TCS, and Wipro.

“IT outsourcing is more dependent on discretionary spending by companies; for example, to expand their operations; but BPO tends to be more basic,” commented Everest Group vice president Amneet Singh. He further explained that the growth in BPO outsourcing has become directly affected by the need for recession-impacted companies to cut costs throughout the last two years.

“If you want to show an immediate reduction in costs, in two quarters or so, it is easier to do it by outsourcing business processes,” Singh said.

Global outsourcing and offshoring in June saw a third consecutive decline in the size of new contracts. BPO contracts slipped to an average of $3 billion between April and June compared to about $4 billion in new IT contracts in December.

Tips in offshoring web development

Don’t have an in-house web development team that you can count on to build that perfect website? Whether you’re looking to improve an existing online endeavor or build a new one, prices can be high and skills hard to find. Offshoring web development is an ideal solution to gain access to experienced web development experts at low costs. Here are some tips to get you started:

1.)    Research beforehand – It is always a good idea to first evaluate your options. This will allow you to accurately define your requirements. Take the time to learn about what works and what doesn’t and the technology available that will help you achieve your goals.

2.)    Be specific – The more details you outline regarding what you want and what your expectations are, the more time and money you will save in your offshoring venture. Take time to figure aspects regarding design, functionality, marketing, and maintenance.

3.)    Look around – The web development offshoring industry is littered with providers and freelancers offering their services. Gather a comprehensive list of quotes that offer both affordability and service quality.

4.)    Evaluate their work – It’s always a good idea to look through the portfolios of your prospective offshoring providers. Be on the lookout for the quality of the backend functionalities of some of their websites.

5.)    Clearly define the goals and costs – It is important that your offshoring project runs on a clearly defined schedule from the start of operations to project sign-off.

6.)    Inquire about customer support – Many are quick to overlook the importance of the ability of an offshore web development firm to provide customer support. This involves training you to update web content on your own and providing a point person that you can contact if problems occur.

7.)    Plan your marketing approach – A good site is not very useful if it doesn’t draw any traffic. You need to make sure that your site is created with search engines in mind which, in most cases, can cost you more than you thought.

8.)    Establish the owner – A common mistake is not securing the intellectual property rights of your project before offshoring. It is important that you outline who owns the domain name and your control over the backend.

9.)    Document the project – Every step of the project that is taken towards completing the set goals under the set timeline should be documented for monitoring.

10.)    Be prepared for obstacles and delays – Always be ready for the unexpected as complex development projects will always come across technical problems or bugs.

Optimistic Outlook within Philippine Outsourcing Space

A recent study by BPAP (Business Processing Association of the Philippines) and Outsource2Philippines reveals that companies in the Philippines’ offshoring industry are optimistic regarding growth patterns for the coming months. The companies surveyed indicated that they believe their business will grow substantially. The study also indicates that the industry’s suppliers are continuously shifting from voice-based offshoring to more knowledge-intensive services. The survey conjured by BPAP and O2P showed that among the only concerns from the otherwise bright outlook is the shortage of qualified resources in the nation’s labor pool. The issue has proven as the main concern for companies in previous surveys that BPAP has conducted as well.

According to the study, the Philippine outsourcing industry’s top decision-makers are upbeat regarding its political environment. This comes on the back of successfully held national elections in May which respondents claimed had a positive impact on the confidence of clients and investors (more than 80% of respondents indicated that the smooth transition had a positive effect on investor perception). Following the successes of the former president in developing the local BPO (business process outsourcing) industry, the majority of respondents are anticipating an even more successful working relationship under the helm of President Benigno Aquino III.

Among the offshoring companies surveyed, 65% of them stated that they expect their company will grow by six to 50% during the next 12 months. Meanwhile, another 15% indicated that they expect their companies will grow across a range of different sectors - likely a sign of the continued growth of the offshoring industry outside of contact center services.

The Philippines faces a growing list of competing offshore outsourcing destinations. Forty percent of respondents of BPAP’s survey believe that increasing competition is a major concern. Among the nations posing an increased threat to the Philippines’ market share is Central and South America, Egypt, China, as well as eastern European entities such as Poland.

Despite developments in competing locations, the majority of the industry’s representatives feel that the Philippines’ main threat lies within its own borders. Close to half of the total respondents listed the shortage of knowledge workers as their biggest concern.  Currently, only 5-10% of applicants of open positions in the industry are considered for hiring - a trend that executives hope will change.

The next concern for offshoring companies is the ability to retain middle managers with over half of survey respondents listing it on their top three biggest issues affecting their growth.  Resolving both the middle managers and labor pool issues will prove critical as the industry wants to grow in providing more complex services.

Asia Posts Below Average Mega Outsourcing Deals

It seems that Asia-Pacific will need to acquire contracts that are worth at least USD 8.7 billion in outsourcing deals in the second half of this year in order to eclipse last year’s performance. Asia-Pacific recorded just USD 2.3 billion at the end of the first half according to a recent report. The lack of outsourcing and offshoring deals known as mega deals that are worth over USD 200 million has resulted in a reduced TCV (total contract value) for the region for 2010.

TPI Index Asia-Pacific reports that the $2.3 billion worth of contracts in 2010 thus far is down from the $3.1 billion reported at the same point in 2008, and the $5.5 billion reported in 2009. The total is also below the average of $3.79 billion during the last 10 years.

According to the report, the cause of the decline can be traced to the unusually sluggish performances of vertical markets in financial services, manufacturing, telecom, and media. Only one deal valued over $200 million was signed in the region during the period.

TPI predicts that the region faces a steep climb in order to make it to $11 billion and be at par with last year’s performance. This will require attaining contracts worth more than $200 million. According to partner and director of TPI North Asia, Michael Rehkopf, its offshoring industry needs to produce a record US$8.7 billion TCV in the second half of 2010.

The report indicates that 83% of the contracts awarded during the period were valued at less than $100 million - up sharply from the 71% in 2009, 72% in 2008, and just 64% in 2007. IT outsourcing saw the biggest decline with a $6.6 billion deficit in TCV compared to levels in 2009.

TPI reports that 18 business process outsourcing (BPO) deals were inked throughout the first half of this year, which represents close to 80% of last year’s total. Despite the number of small contracts, the region is ten deals away from a record number of BPO contracts.

Telecommunications contracts have continued to contribute to the rapidly growing outsourcing and offshoring market in China and India.

 Australia and India were reported as the top two in terms of TCV market share with India accounting for 32% of the overall TCV (excluding mega deals). Australia topped India having recorded a 42% market share. TPI’s study shows that businesses are looking to solutions such as cloud computing with 140 IT executives globally claiming they had plans to implement it in the future.