Top technology firms are actively moving part of their workforce from the US, UK and European markets to lower-cost destinations. They cite availability of local talent, better delivery and conducive environment as key off shoring reasons. Belt-tightening by global technology giants, a fall out of US economic slowdown, is likely to reinforce India as the most preferred off shoring destination.
While they may not admit it, firms would be looking at stepping the gas on off shoring to curb bloating costs and to lift margins. Networking and telecom software major Nortel, for one, has recently decided to move almost 1,000 jobs from the US and the UK to low-cost, high-growth destinations like India, China and Mexico. The move is aimed at both restructuring business and reducing costs.
The company considers India is critical to grow the business and the largest percentage of the job shift will be to India. It will knock off almost 2,100 jobs from the developed markets.
Two of the main drivers to revitalize the firm had been to double offshore and near shore headcount to 8,000 by end-2009; and a significant drop in costs resulting from a reduction of 3% of overall headcount.
And, the lynchpin of this strategy, which is expected to drive Logica’s growth to above-market levels from end of 2008, will be the 1,500-seater second site at Chennai. The plan to deliver above-market growth is funded by a £110 million restructuring that will lead to cost savings reaching an annualized £80 million from 2010.
To boot, software services major CSC had announced sometime back that it was shifting more UK jobs offshore in an effort to control costs. The redundancies were in its Global infrastructure Services department and, according to sources, the job cuts were aggressive, almost 30% of the staff within GIS.
Moving positions to India will give software companies higher leverage on costs but there are other key business drivers such as focus on revenue creation, increasing productivity and efficiency that will be a major determinant of the shift.
Current US economic slowdown will lead buyers of IT services to consider increasing their off shoring to lower-cost locations. European information technology vendors like Atos Origin and Groupe Steria are also planning to strengthen their service delivery capabilities by leveraging their presence in India.
European clients now want services delivered from offshore destinations that are priced competitively and boast of better skills.
Off shoring is a business decision and it will be carried out in locations, which provide business benefits including cost benefits.
While cost-cutting was not the obvious reason, companies say increasing their presence in India is designed to meet its current and future resourcing needs alongside centers in other emerging market destinations like Hungary, Brazil and China.
The Indian domestic IT Services market grew 18 per cent in 2007 clearly outperforming overall Asia/Pacific IT Services growth rate. Worldwide IT services revenue totaled $748 billion in 2007, a 10.5 percent increase from 2006 revenue of $677 billion.
India-based vendors’ IT services revenue grew 38 percent in 2007, these companies earned only 4.1 percent of revenue tracked, and US-based vendors dominated the IT services market with 55.4 percent of the total.
Across all IT services, IBM continued to be the worldwide market leader, with 7.2 percent of the market. IBM and Accenture delivered strong growth rates, 12.2 percent and 19.7 percent, respectively, and were the only companies that experienced revenue growth rates above the overall market average. While cost remains a key consideration for users in the outsourcing services market in India, operational efficiency and business agility is driving most of the IT Services engagements.
This strong growth, combined with strong first quarter results for market leaders, runs counter to the gloomy and widespread economic concerns arising in the United States.
Many providers are successfully selling buyer value propositions that external spending on IT services and solutions can help customers save money and be more productive, even in a profoundly uncertain economic climate.
To build on their success in 2007, service providers should focus on selling services that will deliver visible return in 2008, either in cost, speed to market, or business impact. They should also focus on growing sales in emerging markets that enjoy faster-growing economies and high growth rates in IT services.