Trends in Indian IT Offshoring

By Thomas Yang

INTRODUCTION AND OVERVIEW

SUMMARY OF FINDINGS
IT budgets are beginning to come under pressure, although most companies have not yet experienced budgetary contraction Due to the slowing economy, many IT executives are reporting either declining budgets or budgets that are being monitored for cuts in the near future Only industries which have significantly underinvested in technology are expecting significant investment increases As a result, there is significant interest in continuing to offshore IT activities, either to continue to reduce current costs or to minimize costs of required new IT investment

Despite significant continued interest in Indian offshoring destinations over the near term, the attractiveness of Indian offshoring destinations from a cost savings perspective is expected to decline over time There is significant continued interest in Indian offshoring projects, primarily for cost reasons. However, IT executives also cited the abundant availability of specific skills and the superior quality of those resources as another significant benefit of offshoring to India Cost savings from IT offshoring are still significant and can vary widely, ranging from 10% for infrastructure support outsourced to an MNC, all the way to 70% savings for application development outsourced to a tier 3 Indian provider However, pricing in India is universally perceived to be going up, with exchange rate pressures and local wage pressures cited as causes. Onshore prices are generally perceived as flat after inflation or down, due to a slowing economy and continued competition from low cost markets Most IT executives have said that Indian companies have had only limited success passing these cost increases to customers. As a result, there has been a move toward fixed pricing, to give Indian companies the ability (and mandate) to be more efficient in their use of resources While share of IT spend to India is generally not expected to change dramatically over the next 3-5 years and may even increase, the maturation of new low cost countries (e.g., China, Russia) is expected to put pressure on India as a low cost IT offshoring destination. However, this may be counterbalanced by the fact that India is working on moving up the value chain to higher level services Tier 1 Indian providers and MNCs were generally perceived to be most favorably positioned to increase their share of market in India, especially as companies began to offshore higher-level services.

IT executives tend to use Indian organizations for lower-level, non-operational tasks, where the processes are extremely clear and the risk of failure is low. Although CIOs still have limited confidence in Indian

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organizations for directly operational or high-level strategic work, this discomfort is slowly disappearing as Indian providers begin developing a favorable track record for these kinds of projects Application spend is the most commonly offshored spend category, with perhaps 20-40% of application spend offshored today. There is still moderate scope for increases in this category Infrastructure spend is less frequently offshored, with most estimates ranging between 5-20% of spend being offshored today. However, the potential is much greater in this category as Indian providers have now built a favorable track record in this arena and companies are beginning to move to take advantage of the potential cost savings Generally speaking, Indian companies today are not regarded highly when it comes to higher level, value-added services, such as systems integration, BPO, and engineering services. Indian companies are starting to pitch for this work, but they do not have a track record of success in this area and are seen as less capable on strategic, high level work Key criteria most often mentioned when choosing an offshore provider include: Expertise/ qualifications in project area Reputation and track record for quality/ success Cost Employee Turnover Financial stability Certifications (e.g., ISO 9000)

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DATA TABLES SUMMARIZING RESPONSES

Financial Services Interview # Overall IT budget trends Pricing trends offshore Pricing trends onshore Vendor Consolidation occurring Degree of stickiness 1 6 9

Insurance 5 10

IT services 2

Healt hcare 4

NA

Yes LowMed

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

Low

Med

High

Med

Med

High

High

High

High

Table 2: Indian IT trends Manufacturing 3 15-18% Telecommunications 7 20% Media & Entertainment 8 20-60%

Financial Services Interview # Estimated cost savings Cost arbitrage shrinking? Spend migration to India slowing in near-term? 1 1065% Yes 6 3035% Yes 9 4070% Yes

Insurance 5 2030% Yes 10 1030% Yes

IT services 2 10-40%

Healt hcare 4 ~25%

Yes

Yes

Yes

Yes

Yes

No

No

Yes

Yes

No

Yes

No

Yes

Yes

Yes

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Table 3: Category trends Manufacturing 3 Telecommunications 7 Media & Entertainment 8

Interview # Application % offshore today

Financial Services 1 6 9

Insurance 5 10

IT services 2

Healt hcare 4

3040% Med

3-4%

1520% Med

50%

50%

20-25%

30-35%

25%

50%

30-35%

Rate of growth

Med

Low

Med

Med

Med

Med

Low

Med

Infrastructure services % offshore today 2030% High < 1% <15 % High Lowmed High 40% Low 10-12% 5-10% 10% 15-20%

Rate of growth

High

Med

High

Low

Med

Med

Med

Degree of perceived expertise in other services Systems Integration BPO Engineering design services Low Low Low Low Med Low Med Med Low Low

Low

Med

Med

Low

Low

High

Low

Low

Low

Low

Low

Low

Low

Low

Low

Low

Low

Low

Low

Low

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Appendix

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PROJECT METHODOLOGY
Process Data was exclusively gathered through interviews with 10 senior IT excecutives in Europe and the United States, who controlled at least $25 million of offshored IT spend. Expert profiles Below are profiles of the experts who were interviewed for this report. Former CTO at major financial services company with 18 years of experience across the entire spectrum of IT. Senior IT Executive at a major financial services company. Responsible for managing global initiatives and operations across 5 regions in over 100 countries. Global Chief Architect at a major insurance company, specializing in software development technologies. Senior IT executive at a defense electronics manufacturer, specializing in business process outsourcing, IT management and strategy development, budgeting, vendor management, business process improvement, and service level agreement management. CIO of one of the world's leading providers of systems integration and other technology services, including application development, data hosting, networking, and management consulting. Senior IT Executive at a banking and financial services company, with over twenty years of experience in the information technology industry. CIO of an insurance company, with more than 20 years of IT experience in Financial Services. CIO at an integrated healthcare delivery systems company, with experience in partnering with business and clinical leadership to leverage technology investments. CIO for a major telecommunications company, with more than 29 years of experience in IT Former CIO of a major media and entertainment company, overseeing an IT budget of $270MM

INDIVIDUAL INTERVIEW SUMMARIES

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