India's fast-growing Information Technology outsourcing industry is expected to receive a further boost, thanks to IT software companies the world over stepping up their reliance on offshoring for their product development, according to a study made by the global IT research giant Sand Hill.
Describing India as the ideal offshoring destination in the world, the study says the IT companies of the country will grab a huge chunk of the business in the offing, thanks to their technical capability, domain expertise and flexibility, The study, which surveyed a large number of independent software vendors in the United States, has found that more than 80 percent of them offshore their product development projects to India while a mere 5 per cent offshore their projects to Canada or China.

The study, commissioned by Pune-based Persistent Systems, showcases a rising maturity among international software vendors in identifying and adopting the appropriate approach to ensure success in their offshoring initiatives.
The latest study gathers the views from CEOs, CTOs, VPs of engineering and R&D departments of top US-based product development companies for a detailed analysis, which also relies on the findings of two earlier reports, one made in 2003 another two years later

The current study provides a deep insight into the operations of the offshoring industry at a time when software companies are becoming more heavily reliant on offshoring, making it an integral part of their business strategy.
Among the many aspects of the offshoring industry analysed in the study are trends and challenges in offshoring, augmentation in functions sent offshore, demand for outsourcing partners as compared to captive centres, and a comparison between the performance of both these models.

Anand Deshpande, Chairman and Managing Director of Persistent Systems, said, "the report gives software companies a directional insight into the state of offshoring in the software industry today. It clearly underlines that the industry is growing and maturing. Cost is no longer the only consideration. Speed to market, workforce flexibility and domain expertise are the drivers of the industry."

M R Rangaswami, Managing Director of Sand Hill Group, said: "With over 60 per cent of software companies being more reliant on offshoring now than they were two years ago, software companies feel that offshoring has to be strategic to their business model, highly collaborative and leveraged in all phases of the product development lifecycle. The Sand Hill - Persistent Systems Study on Offshoring 2006 investigates how this is done and gives actionable advice."

UK Falls in Line As outsourcing has become a globalized business, the political outcry in various quarters, especially in the West about the phenomenon causing job losses in the vendor countries, has lost its shrill. In fact, more and more countries are realizing the benefits of outsourcing. For instance, in Britain, workers' unions have understood that outsourcing would lead to efficiency of British companies resulting in more jobs, according to British MP Stephen Pound, who was in Kolkata recently to explore opportunities in a few identified sectors such as bio-technology, IT and ITeS, healthcare and agro-processing.

Pound, chairman of the Labour Friends of India, was heading an eight-member delegation, which met members of the Federation of Indian Chambers of Commerce and Industry (FICCI) t a roundtable business discussion.
It is expected that the improved situation in the UK would be a boon to the growing IT enabled services sector that was partially affected by large-scale agitation by British labour unions over shifting of jobs to India.

		Chennai, the Winner As India's share in the global outsourcing pie has grown, more and more IT centres in the country are clamouring to grab a chunk of this business. According to a recent survey by US based A T Kerarney, Chennai has emerged as the most attractive destination for offshoring services, closely followed by Hyderabad, Bangalore, which occupied the top slot in the previous years, had been pushed down due to

lack of infrastructure. Releasing the company's Indian city services 'Attractiveness Index' for 2005, recently, Marcy Beitle, vice-president, A T Kearney, said that Kolkota was emerging as a credible alternative to cities, with more companies setting up offshore services industries there.

The support of present and past governments to the IT industry had made it possible for Chennai to become a favourite destination, she said. The cities had been benchmarked as attractive, based on three major categories - financial costs, people's skills and business environment.

Chennai stole a march over other cities as the cost of living was low and the city has abundant supply of skilled labour. In fact, Chennai's cost of living was very close to Tier II cities of India and the lowest among metropolitan cities. India had focused on the development of information technology and IT infrastructure during the past decade and the country today offered the most mature supply base for offshore work across services and verticals, she said.

Global Outsourcing Deals Hit Record $22 bn in '06
As many as 83 outsourcing transactions with a total contract value of $22.7 billion took place during the first quarter (January-March) of the calendar year 2006, the strongest ever performance in the history of outsourcing, according to an industry report, The quarterly report on the global outsourcing industry announced by outsourcing advisory firm TPI recently referred to seven mega deals each worth over $1 billion. Out of the transactions, seven went to India-based service providers with a value of $512 million, a 2.3 per cent of the total value.

Cost savings, the report said, is relatively a myth since contrary to the usual belief, a research conducted by TPI examining the outsourcing contracts awarded between 2003 and 2005 found that the companies enjoyed just 15 per cent of cost savings in an average. "In our experience, outsourcing arrangements which focus solely on delivering of huge savings often fail to meet clients' expectations," said Siddharth Pai, partner & MD, TPI India. "It is the quality and timely delivery of the services which play a huge role apart from cost savings, while going for outsourcing,"
The TPI report said that in terms of industry wide contracts, American firms topped the list with 69 per cent of the total contract value, replacing Europe, which has shrunk to the number two position with 25 per cent of the total value in the quarter. In the corresponding quarter last year, Europe was leading with 46.9 per cent of the total value. Asia Pacific contributed 6 per cent of the total value.

Restructurings, which include renegotiations, extensions and renewals to the existing agreements, represented 33 per cent of the total contract value signed in the quarter, which is also another area of shift in the quarter. In the whole of 2005, restructurings contributed just 24 per cent of the total value.

Consolidate, or perish!
As the global outsource business is growing by leaps and bounds, the low-cost advantage and broken business models, which are the key drivers of the business, are expected to lead to a phase of consolidation of global outsourcing units in the near future.

According to a report from Forrester Research, even the top-tier Indian firms will have to rely on acquisitions to compete with global giants like IBM, EDS or CSC.


The report analyses potential buyouts of global outsourcers by private-equity firms as well as the trend among the outsourcing industry leaders' scramble to buy or be bought. This means that leading equity buyers believe there's an opportunity to make money fast in the outsourcing space, and that mergers and acquisitions could dominate this space mainly due to double-digit growth in new deals, long-term contracts, and the popularity of outsourcing. The report says that given the recent hostile takeover attempts in outsourcing space globally, expectations of seeing many leading outsourcers making aggressive moves to protect their businesses. These strategies will range from acquiring other competitors to acquiring their own stock. Already, there are firms (like EDS, CSC, ACS) that have made moves on these lines. For the top-tier Indian firms, the report asserts they will have to acquire either BPO firms with vertical industry knowledge or -- infrastructure outsourcers with experience of managing servers, desktops, or networks if they are going to compete head-to-head with top global firms. The report states the level of experience required before a customer will trust its operations to a third party is something the Indian outsourcers do not have yet. So they will likely have to buy their way in by acquiring firms -- or similar firms -- such as Getronics or Siemens Business Services. According to the report, in a leveraged buyout scenario of a major outsourcer, shareholders and the private equity firms will emerge likely winners; but the universal loser in all of this will almost certainly be the outsourcing customer.