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The economic slowdown has resulted in increasing number of US-based companies now outsourcing their offshore R&D related work to third-party service providers in China, who charge lower billing rates. This has impacted the Indian outsourcing market adversely.

While the Indian R&D offshore outsourcing market is projected to grow at 14-16% in 2009, the Chinese market is expected to outshine India with a 30-35% during the recession period.

Even though China is only about 1/3rd of the total Indian R&D offshore outsourcing market in size, it has a relatively faster growth ratio than India. This is basically due to the capabilities of China in the manufacturing R&D and also lower billing rates.

In fact, India’s R&D offshore outsourcing market, which is estimated at $43.5 billion, experienced a 21% growth in 2008, while the China market, estimated at $9.5 billion, grew at a phenomenal 46% during the same period. It is primarily due the rupee fluctuations; the appreciation, followed by the depreciation, has largely impacted this market.

Talking to CXOtoday, Praveen Bhadada, engagement manager at Zinnov Management Consultancy, said, “The upswing in the number of US-based companies trying to offshore their R&D related work to third party service providers in China, among other factors, has resulted in this trend.”

The billing rates of the service providers in China are relatively lower compared to India. While Indian IT firms charge $24 per hour for new product development, Chinese firms charge $21 per hour for the same work. The billing rates for Indian IT firms are higher owing to factors such as better quality, IP protection and timely delivery. “But in the present economic recession scenario, both vendors and customers are looking to optimize on the billing rates,” said Bhadada.

In 2005, outsourced work to China amounted to $408 million, of which US had a 52% share. In 2008, China outsourcing R&D related work amounted to $1,287 million and US share amounted to 64%.  Similarly, Europe and Japan have also contributed to the major share of outsourcing work to China.
Another reason is Indian service providers do not offer a broad array of R&D services as opposed to their Chinese competitors and their focus is primarily on IT services. In fact, the total Indian service providers R&D headcount numbers to 110,000 with about 130 pure Indian players while the number in China is estimated at 39,000 to 45,000 with about 250-plus local service provider companies.

As per a Zinnov report, Indian service providers in China have not been able to scale up their R&D operations in spite of having ambitious ramp-up plans since inception. Also, all the major Indian IT players like TCS, Infosys, Satyam and Wipro have failed to reach the targets and also failed to make any inroads in China. Indian firms were to grow their headcount by 25% annually, but none have managed to do so.

India has been the preferred outsourcing destination for so long that we have begun to think that no one can catch up with us. This is a delusion that we need to snap out of fast, said Mike Lafford, group VP of Gartner Research.

China is one country that India-based service providers have to keep looking over their shoulders for, especially when it comes to commodity-based services, he further said. But the competition is not only from China, but from a host of other third-world countries that are slowly emerging as preferred outsourcing destinations.

“When you look at countries like Vietnam, Thailand, etc., where they compete with India is on the pricing front. This is important especially in the current times,” said Lafford.

But the difficulties are not only from our Asian neighbours. “Countries in Latin America and others like South Africa and Brazil are slowly emerging as outsourcing destinations. Currently, they are catering to organizations based internally, but they could start competing with India and China in the future,” said Lafford.

Plus there are also countries in Eastern Europe that are improving on the outsourcing front. Where these new emerging centers benefit from, according to Lafford, is that organizations that are outsourcing for the first time do not want to move far away from their region. Culture and language are also critical issues.
Speaking of China, Laffard said that though language and culture is a big hurdle for Chinese companies, where they have an edge is that they can learn from the mistakes made by their Indian counterparts and avoid them. So the way is somewhat eased for them.

However, Lafford does say that these new countries will find it hard to compete with the likes of India and China on the skills front. Where they could win is on the culture, language, geography, and most importantly, pricing front.

So what can Indian IT service providers do to maintain their dominance? Many things, according to Lafford. Firstly, they need to establish relationships with countries in geographies other than the US and the other traditional regions. Secondly, language is still a problem in India and Indian service providers need to rectify it immediately. Though English-speaking regions seem to prefer India right now, if we want to tap non-English speaking geographies like Africa, South America, Eastern Europe, etc., then language and culture will play a major role.

The global economic meltdown can be viewed as a treasure trove of opportunity, if the approach is right. “We have seen companies that never outsourced, considering outsourcing due to the unstable scenario. Insourcing is another huge opportunity and this is seeing growth currently. However, service providers shy from this due to the lower business margins.” Lafford also said that the momentum of outsourcing is such that it might slowdown, but never stop completely.

“Outsourcing of processes by global banks and financial sectors will now become vivid to reduce costs,” said Peter Redshaw, VP-Research, Gartner, at the ongoing Nasscom meet in Mumbai. “The matured IT sector and business processes will make India one of the viable destinations for outsourcing banking processes. Until now financial institutions were wary to outsource processes outside their geography,” he added.

Predominantly focusing on expansion strategies, banks and financial institutions in the matured economy have undermined the importance of calculating the operations cost, Redshaw said, adding they will now need to shore operations to the growing economies (India and China ).

Many in the industry have adopted cloud computing model. But due to the inherent disadvantages of cloud model such as exposing the services to the vendor and lack of clear nomenclature and authoritative consortium, banking and financial institutions will need to entirely outsource IT services to reduce cost, Redshaw said.

Raja M.Mitra, senior consultant at World Bank, too, sees countries like India, having track record of proven IT services with large pool of talents, in a better position to bag IT services compared to rest of the world.

Apart from the BPO segment, system integrators in India (which is substantially large, India being a service segment in IT to the world) will also benefit from the present economic scenario.

Peter Coffee, director (platform research) of Salesforce.org said that though expansions in IT are under hold at present, IT investments will now focus towards integrating systems to give customers benefits of interoperability, bringing more business to IT integrators.

Together, the Indian IT sector, with mature process models, services and integration, will bring more value and shoulder international customers to reduce operational costs.

In the current economic climate, one of the main tasks is to develop creative solutions for businesses through hard sell. Most of these solutions are often to reduce costs in the model, such as shops, and an option is the outsourcing of functions or specific projects.

In the world of IT outsourcing, costs are not only related to the price of the service - which is often as important customer bears the costs of relationship management services. Coordinating the work of your company with the outsourcing partner can be a challenge, especially if the supplier is at a considerable distance from your business. And synchronization of office hours and geographic factors may be important in themselves, the most of your IT outsourcing partnership - real-time communication and possible business are essential to the effective cooperation and effective team project.

The outsourcing of IT projects of North American firms to India, China and Hong Kong has been the norm for years, but today many of these companies are to achieve the benefits of near-shore IT outsourcing. The companies also want to reduce risk and diversify their portfolio of suppliers. Labor costs in India is not as cheap as in the past and the current geopolitical environment, it may concern for the coaching in North America.

Near-shore outsourcing allows businesses in North America of the exit of work for the Latin American countries. The proximity means that travel and communications are easier and less expensive, there are probably at least a few similarities between cultures and partners tend to speak the same language.

Brazil has very quickly especially a major hub for cost-effective IT support for businesses in the United States and Canada and a Top Five in the world of outsourcing. Brazil has a low turnover rate and its computer professionals have a high level of technical and vocational skills can. Sao Paulo is the second common Java programmers outside the United States. And because a successful financial and banking sector, Brazil IT staff many as mainframe programmers.

Companies in North America recognize that the Brazilian economy to culture is also very similar to their own. Brazil employees are fast, their ideas for improvement projects. If they believe that the projects in another, more efficiently, they share their ideas and work with the project leader. Managers who often mentioned that outsourcing is a challenge in countries like India, China and Hong Kong, where the employees are the culture of it, for the rules and guidelines, which by themselves their employer.

Despite these synergies, most of the subcontracting companies in Brazil or in Latin America, said that the number one reason why they rather near-shore outsourcing computer, time, convenience. Brazil is one hour from the East Coast of the United States for 10 months of the year (the other two months Brazil is three hours before). In comparison, India is 11 to 12 hours before the east coast of the United States and in Beijing, Shanghai, Hong Kong and 25 hours in advance. It is also the time when the journey in one place. Brazil is a nine-hour flight from the east coast of the United States, compared with 18-hour drive to India and 16 hours in Shanghai and Hong Kong.

The trip was an important factor in the decision to outsource HNI Corp. projects in Brazil. HNI Corp., the largest U.S. manufacturer of office furniture in Muscat and Iowa, wanted to expand its staff of developers, but did not want the manager to travel around the world, if necessary to consider in developing forward. HNI realized the need for some degree of face-to-face interaction and wanted it as comfortable as possible. The cost of output in Brazil India and China was the same, but the ease of travel for a conviction HNI Near-shore partners.

Many companies believe that outsourcing the management of a development in a team of 18 to 24 hours the difference is extremely difficult and often delays and failures in the projects. Feedback and agreement on the initial project details within a project enough that companies must change how they operate, so that projects in the calendar.

Ider, Houston-based enterprise software management tools and backup Microsoft Windows Server, outsourcing to Brazil and the time zone was one of the main reasons. Idera competition for talent with the energy sector in Houston and outsource their IT projects, the ideal solution. Idera the biggest concern was looking for professionals, which, in its teams and embed work together with them. Idera was concerned that a large time zone difference would be detailed plans and lists for each project. Thanks to outsourcing in Brazil, IDERS indicates the absence of a significant difference in the time zone takes all that is in the same way, teams work together, and improved productivity.

It is not only companies outsourcing to countries closer to their own, but more and more outsourcing of business processes. Non-transaction Business Process Outsourcing (BPO), non-core activities such as staff costs, training and finance and accounting functions. Off-shore companies, these businesses for a fraction of the cost of operating the same functions in their countries of origin. And because, as personnel and accounting are essential and fundamental to the company, with similar functions during business hours is a must.

At the end of the base of the Near-Shore Outsourcing has become a viable and effective, so - outsourcing at home to help businesses more effectively and efficiently manage IT project.

Independent research firm Forrester Research has in its latest tech market report titled ‘US IT Market Outlook: Q4 2008′ revised its 2009 US IT spending forecast. It is now projecting 1.6 per cent annual growth as against 6.1 per cent in US IT spending in 2009, stating that the US IT market outlook is down but not as bad as the 2001-02 tech depression. On the other hand, the report notes that the IT consulting and systems integration services will hit the wall in 2009 and IT outsourcing growth will remain moderate in 2009 and 2010.

While IT outsourcing will get a small lift from the economic slowdown in 2008 as companies turn to vendors that can help cut IT costs, the growth in IT outsourcing revenues will remain moderate. This will be owing to trends toward use of lower-cost offshore resources, smaller scale outsourcing deals and the 9-15 month lag from the decision to outsource. One area of growth is likely to be demand for managed network services offerings, which vendors are pushing and clients are increasingly adopting, the report said.

The US tech market forecast assumes that the decline in US real GDP in Q3 2008 will accelerate in Q4 2008 and the first half of 2009 before a weak recovery starts in the second half.

The report is based on analysis of US Department of Commerce data and financial reports of 49 IT vendors, and details the current IT spending across computer hardware, software, communications equipment, and services. Andrew Bartels, vice-president, Forrester Research, who authored the report said in a statement that the recession in the US would last into mid-2009, with declines in real GDP of as much as 3.6 per cent on a quarterly basis. “This kind of decline in the economy will pull growth in US business and government purchases of IT goods and services down to 1.6 per cent in 2009, from 4.1 per cent growth in 2008. The weakening of the US tech market was already evident in the Q3 2008 data, which showed US revenues of large vendors down by 2 per cent,” Bartels noted.

The report states that the recession will not be a replay of the 2001-2002 downturn, when tech vendors saw big drops in revenues. “This time, computer equipment vendors will see declines of 5-10 per cent in US revenues on a quarterly basis, not the 20-25 per cent drops of the early 2000s. Sellers of communications equipment, software, and IT consulting and outsourcing services will see one or two quarters of declining revenues, but on average will still grow modestly in 2009. So, IT vendors need to have a plan that mirrors what will happen in their sector,” Bartels cautioned.

The report expects financial services, consumer durables, construction and housing, retail, and industrial products (including automobiles) to be the industries most likely to cut back IT purchases in 2008 and 2009. The financial services industry is expected to cut IT purchases by 3 per cent in 2008 and 4 per cent in 2009, and the construction industry by 2 per cent in 2008 and 2009. The retail industry will have no growth in IT purchases in 2009, and IT buying by industrial manufacturing will slow to 1 per cent in 2009, Forrester says, adding that state and local government IT spending will also be weak.

The report notes that the BRIC (Brazil, Russia, India and China) markets are still growing, raising hopes for US export growth to continue. While the major industrial economies have gone into recession, emerging markets like BRIC are still growing, though at a slower pace than in 2007 and early 2008.

The combination of a somewhat weaker dollar in the near term and still-growing emerging markets suggest that US export growth may not collapse.

Indian IT outsourcing and consulting services vendors have seen 3 per cent decline in US revenues in the third quarter (ended September) of 2008. Even Indian vendors saw revenue growth slip to less than 20 per cent, with Tata Consultancy Services (TCS) posting just a 6 per cent increase )see table). Infosys and Accenture had the strongest growth in US IT services revenues at 17 per cent, though still below Q2 figures, Forrester said.

2007, India managed IT services market was projected to be $1,170 million with managed network services accounting followed by managed desktop services. This represented 20 per cent of the total India domestic IT services market and 2007 it is crossed $5 billion and Indian Managed IT Services grow at 24.9% which is a good sign for 2008 and coming years.

“The traditional IT outsourcing model is under siege and “Risk and Reward” deals are now becoming popular.” “Today, service providers are launching low-cost, highly flexible service delivery platforms that leverage ‘commoditized technology’ to provide more ‘productized services’ to customers.“

Seepij Gupta, Assistant Manager, Software & Services Research, IDC India

Current market analysis many enterprises implementing and providing infrastructure management services (IMS), as they are looking for proficient partners to manage their increasingly IT infrastructure.

As all small and large size enterprises are taking benefits of outsourcing their IT infrastructure. So new definition of managed services can be defined in one sentence - it is all about “Do it for me” not “Do it yourself”.

“While engaging in outsourcing contracts, management should have a clear vision on long-term organizational goals along with activities that can be outsourced.”

Praveen Sengar, senior manager, Software and Services Research, IDC India