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The Changing Outsourcing Landscape

January 25, 2010

Originally uploaded by * etoile

by Kim G.

India has long been the dominant country when it comes to Business Process Outsourcing (BPO), however, times have changed.  The National Outsourcing Association (NOA) published a report titled “Best Practice Outsourcing and Offshoring” which pointed the issue Indian offshore providers face –increasing operational costs forcing some providers to relocate their centers to cheaper areas in India in order to compete more effectively, although this move has not hindered a recent surge in emerging outsourcing destinations. “Despite recent optimistic predictions from the NASSCOM conference, India is experiencing the effects of a global slowdown and a reduction in IT spending.  Costs for Indian vendors are also on the up.” –NOA report. Indian BPO providers may not be the only ones experiencing increasing operational costs, other offshore providers experience this as well but at a lesser extent as countries such as the Philippines receive strong government support.

Proof of Indian outsourcing providers struggles are evident as Infosys Technologies Limited (NASDAQ: INFY) forecasts its first annual revenue fall for the year to March 2010 due to client pricing demands. INFY is looking for 12 to 15 deals worth $1 billion or companies worth 10% of Infosys’ revenue. The firm is considering acquisitions in Europe, Latin America, Australia and Japan, a step that could help boost slowing growth by geographical diversification.

Gartner group vice president Mike Lafford warned CIOs not to sign outsourcing deals longer than 5 years and said that the best practice is to sign contracts with a base term of 3 to 5 years with extension clauses of up to 2 years. According to Lafford shorter deals are more compeling as long term deals will often fail due to the pace of technological advancement, changes in business requirements, and other unforeseen events such as that experienced by Satyam’s clients. “For the last three years, I’ve never spoken to any organisation that was satisfied with a ten year deal they’d signed”, argues Lafford.

Despite Gartner’s warning, the NOA’s quarterly Outsourcing Confidence Index study reveals confidence in the outsourcing industry continues to improve with 40% of outsourcing providers forecasting revenue growth. Further, providers are experiencing an increase in high-volume, low-cost deals.

NOA’s findings support Everest Research Institute’s second quarter report on global outsourcing and offshoring activity which shows outsourcing transaction volumes increased by 10% globally compared to the first quarter of this year.

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