Consulting and application testing are among the newer services moving overseas as offshore IT services look to more than double over the next five years.
Offshore I.T. firms will enjoy double-digit gains in sales over the next several years as vendors from India and other emerging markets boost their capabilities and U.S. and European businesses continue to seek ways to cut technology-related costs, new research suggests.
The worldwide market for offshore IT services will grow to $17 billion in 2008 from $7 billion in 2003, achieving a compound annual growth rate of 20%, according to a study released last week by market researcher IDC. The study tracks only those IT-services sales won by offshore companies such as India's Wipro Technologies and Infosys Technologies. It doesn't include the value of work being placed offshore by U.S. service providers such as IBM and EDS.
The growth is driven in part by the fact that some IT-related work that has been relatively immune to offshoring is starting to move overseas, says Barry Mason, a senior analyst at IDC. "We're starting to see offshore firms move up the value chain," Mason says. IT consulting, he adds, represents one new market that offshore firms are aggressively pursuing.
The good news for some U.S. IT professionals: As offshore companies expand, they're opening offices in the United States and hiring locally, albeit in modest numbers and at very senior levels. Cognizant Technology Solutions Corp., an IT-services company with headquarters in Teaneck, N.J., and operational centers throughout India, has hired five senior-level consultants in the United States this year and expects to add another five next year, says Kaushik Bhaumik, VP for Cognizant's Business Technology Consulting Practice.
Bhaumik, formerly an associate principal with McKinsey & Co., says there's little reason why the same economies that offshore companies provide for basic services such as application development and mainten- ance can't be applied to consulting. "A lot of the number crunching that backs up the engagement can be done overseas," Bhaumik says. As a result, he says, Cognizant can sell a project that would typically cost about $300,000 for about $100,000. Among the company's offerings: application portfolio analysis.
Some U.S. vendors, however, are skeptical about the extent to which the offshore model can be applied to consulting. "It's not a market that's driven by low cost. It's more about how you can successfully transform a customer's business, and that requires a lot of local knowledge," says a spokesman for IBM Business Consulting Services.
But offshore companies are building out their capabilities in other ways, too. A bellwether of the application-outsourcing market, Wipro has built a software test center at its Bangalore, India, development campus. With the center, Wipro will be able to add application software testing for both function and performance to its outsourcing services. It will also be able to test apps its teams develop before shipping them to U.S. and European businesses. "Testing used to be done on an ad hoc basis as the client requested it, was done by the client, or wasn't done at all," says Chris Lochhead, chief marketing officer of Mercury Interactive Corp., whose testing tools will be used in the Wipro Center of Excellence.
Most outsourcing companies don't yet offer testing as a standard service, Lochhead says. Wipro's test center is a sign of the growing sophistication of offshore-outsourcing companies, he adds. Having competed successfully on price, he says, now they're better equipped to guarantee performance and "compete on quality as well."