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'India's IT outsourcing boom over'

A study shows hubs like Bangalore and Chennai are reaching saturation and are looking for resources elsewhere.

india Updated: Jul 15, 2006 11:28 IST

The IT outsourcing boom seems to be over worldwide, including in India, as companies learn to be more strategic and selective but it's still too soon to call it the death knell, according to a new study.

In India, outsourcers are looking to China as a means of alleviating their growing labour shortage, says the study by Chicago-based consulting firm DiamondCluster International.

Major IT and BPO services hubs, including Bangalore, Chennai, and Hyderabad, are reaching labour saturation and are desperately looking for educated resources elsewhere.

Within India, providers are building technology centres in lesser known locations like Kolkata, Mysore and Chandigarh.

The situation in India will drive both buyers and providers to expand their list of possible locations for operations with the labour shortage presenting an opportunity for other countries to fill the gap, the study said.

It's no surprise that a solid 75 per cent of buyers participating in DiamondCluster's fourth outsourcing survey are outsourcing to India.

But Canada is making headway as a haven for outsourcers. US-based buyers apparently believe that the higher cost of outsourcing to Canada is worth the gains in proximity, language and culture.

China has simultaneously emerged as the contender to challenge India in the years to come. The number of buyers that expect to offshore to China has soared 48 per cent since 2004. In addition, more than half of the offshore providers currently operating in India expect to grab market share in the burgeoning Chinese economy.

"Buyers are reaching the mid to final stages of current outsourcing contracts and find themselves distracted from focusing on new initiatives. And many buyers are telling us they have already captured the 'low hanging fruit' and are slow to seek out additional outsourcing opportunities," said Tom Weakland, who leads the outsourcing advisory services practice at DiamondCluster.

While buyers - 64 per cent offshore and 50 per cent onshore - remain committed to increasing their purchasing, these numbers represent a significant decline from prior years.

In 2004, none of the study participants said they would decrease the amount of outsourcing they were doing. This year, nine per cent of the buyers of onshore services and eight per cent of offshore buyers said they plan to decrease their levels of outsourcing in 2006.

"Companies are reining in outsourcing for three reasons. Either they mistakenly outsourced a process or function that is core to their business and are now bringing it back in-house; their provider over-promised and under-delivered; or the complexity of managing and measuring outsourcing projects and relationships overshadowed the benefits," says Weakland.

"This is by no means the death knell for IT outsourcing. However, boom years for growth have come and gone," he said.

"This should serve as a wake-up call for outsourcing providers that all is not well with their customer relationships and that they need to refocus on quality, clarity and measurement."

The latest DiamondCluster study reveals some troubling signs for onshore service providers. For example, less than one in three buyers of onshore services reported that all their expectations are being met, compared to 47 per cent of the buyers of offshore services.

Forty-seven per cent of buyers reported that they had abnormally terminated at least one outsourcing relationship in the prior 12 months. But here again the numbers were worse for onshore providers.

While only 28 per cent of buyers had terminated at least one offshore relationship, 42 per cent of onshore service buyers reported they had done so. Among those, 53 per cent cited poor performance by their onshore provider as the reason for abnormally terminating a relationship.

"We should also expect to see fewer successful new entrants. Second tier and smaller firms may have to face a hard choice between being acquired or building deep industry or functional skills to differentiate themselves from the outsourcing behemoths," said Weakland.

"Onshore firms in the US, many of whom have already established substantial operations in lower cost countries, may further consolidate their resources outside the US to achieve the obvious cost advantages that offshore operations provide," he added.

Buyers are also increasingly concerned about uncertain financial payback of their relationships with their onshore outsourcers. It was their second most frequently cited concern after the risk of increased management complexity.

Buyers seem to be signalling growing concern about the effectiveness of their onshore outsourcing relationships. It appears that many onshore relationships have become so complex it is difficult to gauge their financial success or failure.