The Future of IT Outsourcing

silicon.com has a nifty feature on five directions which information technology (IT) outsourcing is likely to take:

(1) Consolidation. Competition for outsourcing contracts is more cut-throat than ever with a huge expansion in the number of suppliers - so some significant consolidation is on the horizon.

Recent rumours of a merger between sector heavyweights Infosys and Capgemini suggest the stars are aligning for some significant marriages. Duncan Aitchison, managing director of business advisory company TPI, told silicon.com even if the rumoured Infosys-Capgemini tie-up never materialises it reflects current "market sentiment", while other industry experts are predicting more mergers-and-acquisition activity in this sector over the next year or two.

(2) Globalization. There has long been talk of India losing its edge in the offshore outsourcing market - including warnings of a looming skills crisis - but a bigger threat to India's dominance could lie closer to home. According to a study by analyst IDC Chinese cities will overtake their Indian counterparts as top destinations for offshore global delivery by 2011.

While the scenario of China outstripping India remains unlikely, the trend is for increasing globalisation of the market as more regions seek to cash in on the offshoring boom. Beyond the Bric bloc of countries (Brazil, Russia, India, China - or 'Bricm' including Mexico), small-time, near-shore developing nations, such as Egypt and Poland, are rising up the agenda. The trend is not only for a "greater pattern of diversity" in the offshore outsourcing sector, said TPI's Aitchison, but also for greater specialisation as smaller players seek to distinguish themselves in an increasingly crowded marketplace.

(3) Person-to-person offshoring. Offshoring is more commonly associated with the idea of large-scale business redeployments - the relocation of a back-office function, say, or a whole department. But research suggests there's growing momentum on a much smaller scale. According to a report by research company Evaluserve, offshoring has reached small businesses and even homes - a trend it dubs 'person-to-person', or P2P, offshoring.

Examples of services offshored in this way include online tutoring, web and software development, and writing and translation services. Customers for this type of offshoring can be small businesses or even individual consumers. Evaluserve says revenue for this sector stood at more than $250m between April 2006 and March 2007, and it predicts the value of the P2P offshoring market will rise to more than $2bn by 2015.

(4) Green sourcing. Rising energy prices have put the eco issue firmly on the CIO's radar but could pressure to demonstrate green credentials influence businesses' outsourcing decisions as well?

silicon.com's CIO Jury of UK heads of IT recently revealed environmental factors play a key role in the selection of technology suppliers and partners.

(5) Virtual worlds. The rise of virtual worlds such as Second Life is making it easier for companies to hire workers from anywhere in the world whether to build their virtual offices or to work as 'meeters and greeters' in them.

It's still early days for virtual world-based outsourcing but businesses are taking an increasing interest in the likes of Second Life so momentum is likely to build. Last month news emerged of a hook-up between a Chinese online entertainment company and the Entropia Universe virtual world, to create a virtual economy that could provide as many as 10,000 jobs. Over the longer term, customer-contact jobs such as helpdesk or call centre roles could migrate into virtual worlds, where customers can be both informed and entertained.

Striking a more cautious note, there are findings from the British outsourcing trade that offshore call centers may not only be more expensive but also result in lower customer satisfaction:

The UK's financial services (FS) companies are failing to save money and are undermining customer relationships by sending UK call centre jobs overseas, according to a recent study by consultancy Compass Management Consulting.

Onshore FS call centres average 10 sales per month while offshore centres have an average of four sales per month. And savings from lower labour costs are disappearing as rates rise in offshore locations, with staff costs increasing by up to 15 per cent per year in countries such as India, the study shows.

Language difficulties can also lower productivity and lead to calls lasting up to twice as long as home-based operations.

Listening or understanding failures occur in an average of four per cent of calls in onshore call centres but for offshore call centres, the figure rises to 18 per cent - and each of these failures can lengthen the call by up to 105 per cent beyond the average due to misunderstandings and lack of clarity, the research reveals.

Simon Scarrott, head of business development and marketing at Compass, said pursuing the "latest management fad" of offshoring in a far-off country makes no business sense in the long term...