IDC: Offshoring forcing local business to reassess IT strategies

As IT budgets tighten, the value proposition of this model is most definitely breaking down the entry barriers even within the most conservative of organisations.

Aprajita Sharma, research manager outsourcing and BPO at IDC said offshore sourcing is one of the factors driving down price levels for service offerings, which may cause a decrease in the market opportunity as the total value of service activities commissioned from external providers by organisations decrease.

He believes, offshore outsourcing will affect the cumulative external spending on services by companies and this may in turn affect the size of the future contestable services market.

"Assuming the current IT activity level stays constant, the size of the IT services market may decrease. With a supplier offering the same (or a suitable substitute) service at a lower price and given completely inelastic demand, there is a possibility that the amount spent by a firm on IT may decrease,” he said.

According to Sharma, IDC believes that while the assumption of complete demand may hold true for a single company, it is not realistic for a market overall, because a single company's external services expenditure may decrease as a result of the offshore model, a decrease in the IT services market to the same extent is highly unlikely.

“Indeed, the services market overall is likely to adapt, for example, by transferring internal budgets to external budgets or increasing the level of activities as a result of the lower prices achieved from the offshore model," Sharma said.

IDC believes, global sourcing in the IT services sector in Australia has become a reality. IT work is increasingly performed in low-wage regions of the world with India being the preferred destination. The captive model of establishing their own service delivery centre in a low wage country is not a popular option for organisations in this market.

“The majority of companies are either engaging a multinational service provider like IBM, EDS or HP with significant offshore resources to do its IT work or hiring an offshore firm (such as HCL Technologies, TCS or Wipro) directly to supply IT services,” he said.

The net effect is the same as the company benefits from obtaining IT services at a significant discount from traditional, local sourcing methods.

According to Sharma, these benefits may be passed on to; customers in the form of lower prices or additional services; shareholders in the form of higher profits; employees in the form of higher wages; and; a combination of the above.

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