Report: Expect Offshore IT Services Firms To Grow

The market for offshore IT services will continue to grow because of aggressive thrusts into enterprise operations by Indian companies and countered by moves from U.S.-based providers that will beef up their own offshore operations.

That, at any rate, is one conclusion outlined in a report released Tuesday by IDC program manager for Application Outsourcing and Offshore Services Barry Rubenstein.

"The offshore industry was largely built on maintenance," Rubenstein said in an interview. "The next step is for the companies to take more day-to-day responsibility of running (IT.) It will be a transformational engagement." Indian offshore outsourcing companies such as Infosys, Wipro and Patni have already been moving to align their services operations to cater more to customers' business strategies, he said.

Predicting that the offshore IT services market will be worth $29.4 billion in worldwide customer spending by 2010, Rubenstein said all players -- both Indian and incumbents -- are aggressively moving on several fronts to capture as much of the business as possible.

"Offshore vendors are aggressively pursuing outsourcing deals that go far beyond the application maintenance engagements that built the industry," he said."By continuing to appeal to the customer need for low-cost labor, while simultaneously offering services that truly add value by helping customers increase revenue, ensure compliance, and become more responsive to changing business conditions offshore vendors are continuing on an impressive trajectory."

Rubenstein noted that Infosys began hiring top-level consultants in its U.S. operation several months ago and since then other offshore outsourcing firms have followed suit. "All Indian companies recognize they have to do this," he said. "They need boardroom presence. There's still a whole lot of work that can be done on-site (in the U.S.)"

Offshore outsourcing firms will continue their drive into the core of IT services in the U.S. by making investments in remote infrastructure management, onshore datacenters, and tools to automate application development and maintenance processes, the analyst said.

Rubenstein noted that IBM, Accenture and other U.S.-based firms supplying IT services have set up substantial operations in India, primarily to take advantage of the low-cost labor market. IBM, for instance, would likely qualify as one of the top five Indian offshore outsourcing firms based on the size of its Indian operation.

With revenue per headcount at $42,000 for an Indian specialist versus $180,000 for a U.S. specialist, both offshore and incumbent firms must work with the salary differences. Indian firms must pay higher salaries for employees in the U.S. while U.S.-based firms, already saddled with the high domestic salaries, can take advantage of the lower cost labor market in India and other countries where offshore outsourcing is growing.0