Source: www.vnunet.com

This year will see in a shift in the IT services market as firms turn to direct sourcing from hosted software providers, rather than traditional outsourcing opportunities, according to industry experts.

Richard Sykes, chair of the Outsourcing Group at IT trade association Intellect, pointed to the difference between direct sourcing and classic outsourcing as “very high productivity server farms at work rather than thousands of IT professionals”.

In reaction to recent reports about Royal Dutch Shell’s plans to outsource around 3,000 IT staff to three services providers ­ EDS, AT&T and T-Systems­ Sykes said this would be a “conservative deal” that is unlikely to achieve maximum cost savings. “Shell could become more competitive by buying services straight off the internet,” he added, for example online email and CRM systems provided by Google and Salesforce.com respectively.

A new book due to be published tomorrow by Nicholas Carr, ­famed for his IT Doesn’t Matter article, also promotes the direct sourcing model.

Carr argues that the cost benefit to firms through use of large utility computing providers, whose economies of scale would dwarf in-house efforts, will eventually lead to on-demand software dominating firms’ IT infrastructures.

“It may take decades for companies to abandon their proprietary supply operations and all the investments they represent. But in the end the savings offered by utilities become too compelling to resist, even for the largest enterprises,” he explained.

Clive Longbottom, service director at analyst Quocirca, pointed out that the biggest barrier to Carr’s model is mindset. “For large organisations in particular, it would be a very brave CIO and COO who would go the whole hog. The first time there’s a break in connectivity they’d suddenly say, ‘Hell, we can’t do anything at all’,” he added.

According to Sykes, the trend by small and medium-sized enterprises towards direct sourcing deals will also result in fewer contracts involving Indian locations because the services are more automated and less people intensive.

The movement to locations for offshore services other than India is an outsourcing trend set to continue in 2008. Indian provider Cognizant has about 500 professionals in Shanghai and plans to double the headcount in the next 12 to 18 months, according to Henry Yang, head of the firm’s China Development Centre.

Meanwhile, experts are playing down reports that Indian offshoring giant Wipro is looking to acquire Capgemini. In late December, a Hindustan Times story said that a bid is expected to take place in January. Ovum analyst Phil Codling said the deal made little sense “in terms of business strategy and logic”.

The weakening of the US Dollar has rendered a shock to the outsourcing industry in 2007. Indian companies were especially hit as the Rupee appreciated by 10.9% in the last 12 months (14.2% in the last 15 months) against the US Dollar. Investors, analysts and the media have been speculating about the impact of margin pressures, risk of business loss in the US, further Rupee appreciation coupled with domestic inflation, etc.
Interestingly, despite worries on the margin front, outsourcing growth expectations stand tall. Companies are gearing up to face the year with aggressive plans coupled with some innovative strategies to fight margin pressures. Either way, 2008 promises to provide plenty of action for the outsourcing industry.

Analysts have put together a list of key trends that we believe will make an impact in 2008.

Smaller BPOs will be badly hit.

Smaller BPOs with low-end, commoditized services are worst affected by margin pressures. These players will find it difficult to raise prices, and will be unable to pay enough to retain the best talent. Small Indian vendors will be forced to innovate with a focus on “differentiating” their services. In 2008, this will become critical not just for sustaining competitiveness but also for the very survival of smaller vendors. The vendors that succeed in differentiating their offerings and thereby climb higher up the value chain, will see new growth or exit options. The others, who are unable to get out of the low-price, low-cost game, will start fading away from the competitive landscape.

Tier-II cities will become hot spots.

The cost and talent pressures will drive vendors to smaller cities at a faster rate. Proximity/connectivity to larger cities and good education infrastructure seem to be guiding the discovery of Tier II destinations like Udaipur, Bhopal, Vishakhapatnam, Nagpur, Chandigarh, Ahmedabad, Nashik, etc. The emerging hot spots are also offering competitive talent at lower wages than the preferred locations, Infrastructure and realty advantages, lower attrition and lower operating costs.

Domestic business will be hot and happening

The Indian domestic market for IT and BPO has typically not interested the large companies, which are traditionally export focused. However, a few large IT deals in the past two years, especially in BFSI and telecom helped in sparking the interest for domestic business in India. Ironically, many of the largest domestic deals, especially in telecom, have gone to multinational vendors. But as the Indian economy grows rapidly, new opportunities are emerging in retail, manufacturing, media & publishing, for Indian vendors to tap. The year 2008 may see a lot of noise around outsourcing in the domestic market. High growth rates, Rupee denominated contracts and better utilization (day shifts) will grab the attention of small and large Indian exporters. We expect that large IT/BPO companies will look for acquisitions in the domestic space to acquire specific capabilities and client relationships.