Inside offshoring: Which country and partner to choose?

Articles and commentary on IT offshoring and BPO in India and elsewhere will be appearing on silicon.com over the coming weeks. You can find them all here.

For businesses looking at outsourcing IT operations offshore, the market can be confusing and daunting. Once a company has decided to outsource, and then to offshore, the issue of which country and which partner to chose is key to the success of such a project.

The most recent figures from analyst Ovum Holway show UK firms spent £545m on offshore IT services last year, and the growth of that market is set to outstrip the wider IT services market and double to over £1bn by 2006. That compares to the US, where IDC figures put spend on offshore services by US companies at $16.3bn last year, rising to $46bn by 2007.

The figures sound big but it is important to put this into context. Offshore outsourcing (not just to India) still accounts for only around two per cent of the total IT services market, and by 2006 will account for only five per cent. Then there is the business process outsourcing market (which we'll look at in a later piece), worth around $200bn globally according to Gartner.

India still dominates the market as first choice when it comes to offshoring, particularly for UK companies because of the strong English language skills of Indian workers and cultural ties between the countries. But alternative offshore countries such as China, South Africa and Malaysia and 'nearshore' locales such as the Czech Republic and Hungary are also gaining market share.

The most obvious choice of IT partner when offshoring is the traditional big IT services house. UK and US firms overwhelmingly go with the perceived safe option of IBM, Accenture, CSC and EDS. For the UK market, LogicaCMG is also building up its presence in Bangalore, while Xansa has a large setup across India for its BPO services.

Alan Forder, operations director of outsourcing services at LogicaCMG in Bangalore, said the company has a target headcount of 1,200 by the end of this year and 2,500 by the end of 2005. LogicaCMG recently moved its work with long-standing customer Britannia Airways to India, managing 120 applications, developing a new sales system and tackling a backlog of development work after that.

The homegrown Indian IT services companies are starting to make an impact in the market too, winning high-profile contracts from western companies. This is a much less risky proposition than it was a few years ago, now that the major vendors have established themselves.

The top three Indian firms, Infosys, Tata Consultancy Services (TCS) and Wipro, all passed the symbolic $1bn revenue mark in April.

Sudip Banerjee, president of enterprise solutions at Wipro, claims there will be fiercer competition between the Indian and western IT firms as the Indian players increase their vertical sector expertise.

"The lines between what is being given to the 'Big Five' and a Wipro are getting blurred," he said. "In the past architecting and consulting would go to IBM or Accenture and we'd get the downstream work. Now all that is getting blurred and Indian companies have built that domain knowledge and experience and packaged implementation capability."

The western IT services companies are all ramping up their Indian presence to take advantage of the lower cost base but Banerjee claims they are two to three years behind the Indian vendors, which are growing at the rate of 20 to 30 per cent a year.

"In five years time there will be a set of Indian vendors equal of the 'Big Five'. Wipro will certainly be one of those. For the international companies it depends on how quickly they can build their back end here."

He added that a "substantial percentage" of the western IT services companies' infrastructure will have to be based in India - up to half in some cases.