Living up to the hype

Has IT and back office outsourcing surpassed the hype cycle and fallen into the trough of disillusionment? I keep hearing conflicting reports about companies' appetite for IT and traditional back office outsourcing.

In the early days a lot of the hype around outsourcing was centred round the cost savings with some estimates putting it in the region of 50%. No firm worth their salt could afford not to outsource, companies were told, prompting the mass exodus of Wall Street IT back offices to India.

Then came the backlash. Local unions were up in arms about jobs being outsourced to offshore centres and some early proponents found those 50% cost savings somewhat elusive when 'hidden costs' were factored in. There has also been a backlash against outsourcing call centres to India, following concerns over the privacy of customer data.



However, one only has to look at the financials of leading Indian BPO providers such as Infosys, Tata and Wipro to realise that Indian outsourcing companies seem to be defying the trend against outsourcing. Although the fourth quarter last year was the worst in five years in terms of the value of outsourcing contracts awarded, according to TPI's Quarterly Index, leading Indian outsourcing provider Tata Consultancy Services increased its revenues by more than 40% to $1.1 billion for the quarter ended 30 December 2006.

The value of new outsourcing contracts declined by 8% in 2006 from the previous year's levels but as more shorter and smaller outsourcing contracts were awarded, the total number of contracts agreed in 2006 increased from 341 in 2005 to 350 in 2006.

Once again a lot of the business was won by Indian providers such as Wipro, Tata, and Infosys, whose business models are geared towards "single-process" and specialist deals. According to TCI, these providers, alongside the Big Five in Europe and other smaller and niche providers, are stealing market share from the Big Six outsourcing companies (CSC, EDS, Accenture, HP, IBM, ACS). In 2006, the Indian-based providers achieved a total market share of 7%, a massive increase on 200's figures of less than half a percentage point.

The rise and rise of India Inc continues with companies like Infosys becoming the first Indian company to enter the elite Nasdaq-100 club back in December. And the pundits say we are likely to see the Indian providers seriously challenging the Big Six outsourcing providers for larger-scale outsourcing deals, although I must admit I have been hearing that for some time.

But is this trend of outsourcing to offshore centres such as India sustainable? Will labor costs in India remain as competitive as competing offshore centres in China and Central and Eastern Europe, and more importantly has outsourcing be it offshore or near shore, really lived up to the hype? The Indian outsourcing market has to peak at some point and level out. What then for the Wipro's, Infosys' and Tata's of the world?