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Outsourcing industry at the crossroads

June 16, 2005

Order books of software exporters are full and the guidance for the remaining period of the year looks positive. CEOs talk of India becoming the de-facto destination for software offshoring.

The list of companies waiting to jump onto the offshore bandwagon is increasing. Signs, which on the surface, looks rosy for the Indian software service exporters.

The reality, however, is different. Beginning from a growing number of dissatisfied customers and premature order termination, the outsourcing landscape is dotted with confused clients, unsure of the value they have gained by embracing outsourcing/offshoring, downward spiralling of rates, and the growing interest in China as an alternate destination for outsourcing services.

Making this startling announcement is a study on global IT outsourcing by DiamondCluster International, a Nasdaq listed global management consulting firm.

The 2005 IT outsourcing study includes the insights of 210 buyers and 242 providers of outsourcing services.

All participants were directly involved or highly aware of their company’s outsourcing-related decisions, states the study. IT budgets of participating companies ranged from less than $5 million to more than $500 million.

The survey points to a continuing growth in the outsourcing market, with 74% of buyers anticipating an increase in IT outsourcing.

However, for the first time – no one did it in the previous surveys — 7% of buyers have said that they would decrease the volume of onshore outsourcing and 5% would do the same for offshore outsourcing.

Though many buyers are several years into outsourcing relationships, they still lack an effective measure to gauge the success of their outsourcing initiatives. Providers say that one of the greatest concerns is meeting unrealistic or immeasurable buyer expectations. Buyer satisfaction in offshore outsourcing has plummeted to 62% from 79% last year.

Still shocking is in the increase in the number of abnormal termination of outsourcing relationships. In the past 12 months, the number of contracts aborted has doubled to 51% from 21% a year ago.

The other key findings of the study are employee backlash continuing to be a major concern of buyers, diminishing worries about US anti-outsourcing legislation and political pressure, and persisting skepticism on outsourcing mission-critical services.

For Indian software service vendors, the bad news is the alarming interest in China, with 40% of the buyers who participated in the survey expecting to outsource some IT function to China over the next three to five years. This compared to 8% who were making those plans just a year ago.