Offshore Market Evolution

The practice of outsourcing processes is increasingly becoming a strategic business imperative. Companies helping to power this automation cycle are targeting one of the highest-growth areas in corporate spending.

• What are some key offshore market trends?
• What is the competitive landscape progression?
• From a vendor and market perspective, what can go wrong?

Offshore Market Trends

• Offshore outsourcing is increasingly being practiced as global sourcing or global delivery.
  
• The offshore footprint is expanding as corporations gain more experience.
  
• The line is blurring between domestic service providers and offshore service providers.
  
• The political backlash due to job loss is making offshore outsourcing a topic with which few companies want to be associated.
  
• The outsourcers are the most aggressive in pursuing offshore strategies.

Competitive Landscape Progression
Which vendor will win? Who will emerge to dominate the offshore market? History has taught us a few lessons that bear repeating. Many of the lessons we have learned from outsourcing apply to offshoring:

• First Mover Advantage and Critical Mass. Whoever signs up the buyers, suppliers, or partners first has the strongest potential to keep them. We are seeing evidence of this with first-tier players such as Infosys, TCS, and Wipro, who consistently are invited to participate in the RFP process.
• Increased Value. Offshoring success is based on increasing the value to the customer by reducing cost, improving service, increasing productivity, or saving time.
• Deep Beats Broad. Some offshoring vendors are focusing on solving all of the needs of an individual market (deep) rather than solving some of the needs of lots of markets (broad). Examples of this are companies such as LUXOFT or Covansys that focus only on IT.
• Domain Expertise. Companies need to understand the industry to understand the problem that needs to be solved.
• Strong Back-End System Integration. Businesses need to keep records, so system integration is key. This creates much higher switching costs and is central to customer retention; thus, displacing an entrenched vendor will be much harder in offshoring than in outsourcing.
• Price Is Not Always the Driving Factor in Offshoring Decisions. Remember the old adage "No one ever got fired for buying IBM?" The companies with solid brand names will prevail.

Vendor and Market Perspective: What Can Go Wrong?
There is a widely circulated theory that offshore outsourcing services will be the growth area for at least the next ten years. A large spectrum of services will be sent offshore, from simple call centers at the lower end, to animation at the middle level, all the way to high value-added R&D activities. Given this rosy picture, how can companies fail?

• Industry moves fast, and winning requires lots of luck and vision.
• Highly capitalized market leaders consolidate markets, leaving fewer spoils for a small select group of companies.
• The big firms such as Accenture, IBM, and EDS are reacting aggressively. Traditional suppliers rapidly move into offshore markets with a blended model and low pricing.
• New offshore players typically can only get traction with small and mid-market buyers and sellers.
• Partner dependency can be both good and bad.
• The competitive landscape becomes more competitive more quickly than expected.
• Too many offshore companies cannot find customers.
• Investors focus so much on market potential that they fail to take business models into account.
• Sub-15% gross margin business models drive zero or disappointing cash flow.
• Other outsourcing challenges include fear of loss of control (the "not invented here" syndrome) and the resulting impact on employees (the "retained team").
• In addition, companies often lack the appropriate internal process measurements, which make it difficult to design contract terms, conditions, and metrics to reward the achievement of the desired results.