US SMEs to push India's outsourcing business

With US companies likely to step up investments, the outlook remains buoyant for India's IT outsourcing and business process out-sourcing (BPO) industry this year. Analysts say the market would expand, engulfing mid-sized US companies.


A recently released survey titled 'Outsourcing trends to watch in 2006' by Forrester Research's Tom Pholmann and Katherine Brown confirms this view. The authors claim IT outsourcing from the US will soon become a $130 billion market while BPO should grow an additional $40 million to $50 billion.

The paper also highlights the growing aggressiveness of Indian software service providers who are now looking beyond applications out-sourcing to expand their service offerings.

This could lead to more action on the acquisition or partnership scene, as Indian software service companies seek a larger slice of the infrastructure and consulting deals. Both these require more feet on the street, which Indian vendors presently cannot offer while keeping costs down.

Hence, the report suggests focus on more acquisitions or partnerships by the top tier Indian firms, replicating TCS' example in 2005 for a BPO presence in the UK and Chile.

The paper expects growth to come from a widening market for out-sourced services, as mid-sized firms enter the scene. The providers, on the other hand, will emphasise their differentiators, based on deal governance and implementation skills.

As out-sourcing spreads, clients are getting savvier in their expectations from the vendor. Meanwhile, new customers in the form of smaller enterprises in the US are entering the field. These companies, which account for 43 percent of the US IT spend, have lagged in adoption of the out-sourcing model. But this is likely to be targeted by vendor companies.

Every service provider of the seven that Forrester interviewed noted that they would not only pursue these players but also chase the smaller, single-tower deals with large clients. The research notes that in this segment, the smaller of the large vendors would be more acceptable to the clients because of comparable sizes.

Also, expect out-sourcing contracts to get shorter and more flexible, says the research. Contracts will also get more adaptive to customer needs as these change during the course of the out-sourcing deal. The service provider will have to be a lot more nimble otherwise it could lose ground to the more flexible provider who re-uses technology and processes across clients.

Unsurprisingly, cost reduction will remain top of the agenda for those looking at out-sourcing work, the report notes. It also records a market learning of 2005: that the BPO market is a series of micro-markets, each of which requires customisation, resulting in higher costs. So, providers will need both, leverage and scale, to achieve their margins.

These will come best from running the infrastructure and applications on which the business processes run. Although clients may not seek bundled BPO/IT out-sourcing deals, providers with the process and domain expertise plus infrastructure will win on the basis of aggressive pricing and service levels.

As the out-sourcing market widens, users of the service are getting smarter. This is expected to lead to greater transparency on deals and the emergence of stronger vendor management groups who will govern multiple service providers.

This could lead to niche consulting emerging in the area of deal governance and recovery. This new advisory service will focus on the delivery part of the deal, allowing firms like Deloitte to bring out their change management and IT governance playbooks and apply them to post-contract out-sourcing advice.

Technologies which manage and measure service delivery will get more attention in the year, as clients want higher service quality at a lower price.

Hence, greater automation is expected to emerge from this as clients want the right level of service aligned with business needs. Service providers and tool vendors could make investments in this space and begin the convergence of service delivery and measurement by combining functionality like contract management, asset management and service catalogues.