Labour armitage - cutting costs by exploiting the availability of lower-wage workers - remains the name of the game in IT sourcing. CIOs continue to seek savings through offshore outsourcing, and the Everest Research Institute predicts those savings will continue to drive sourcing offshore for the next 30 years. Today, 73 percent of Fortune 2000 companies say offshoring is an important part of their overall growth strategy, according to the 2005 Duke University CIBER/Archstone Consulting study. And Gartner predicts worldwide offshore spending will reach $US50 billion next year.
In this, CIO's third global outsourcing guide, we observe how the offshoring world has changed.
The Executive Summary
India remains the leading offshore destination by a wide margin, particularly for companies in Australia, the US and the UK. "Every year, the risks of moving work to India get lower," says Dean Davison, VP of strategic outsourcing for Nautilus Advisors. "India is increasingly more adept at IP protection, providing resilient infrastructure and managing global relationships effectively." Although Gartner estimates that India currently holds 80 percent to 90 percent of the offshoring market, wage inflation and the increasing maturity of other low-cost areas threaten its future dominance. And as India's star has risen, so have its turnover rates - a growing concern for CIOs. Consequently, Davison expects India's market share to shrink 20 percent by 2010.
Today, few companies outsource to more than one country but "most are evaluating multiple locations", especially in the US, says Davison. China is the up and comer. Experts say it could be a powerful rival to India in the next three to five years, even though it currently can't match India's large English-speaking workforce, its level of compliance with international law or its number of IT grads.
Labour and operational costs in Central European countries such as Poland, Hungary and the Czech Republic - attractive outsourcing options for Western European businesses - continue to rise, approaching the level of their customers. So penny-pinching European CIOs are looking deeper into the former Soviet bloc, to countries like Romania, Bulgaria and the Ukraine. Latin American destinations such as Costa Rica, Mexico and Brazil are beginning to attract US back-office and call centre work as the need to service Spanish-speaking markets grows. And AT Kearney suggests that the Middle East and Africa may be the next frontier for offshore operations - if the politics of the area stabilize.
Although labour costs will continue to be the driving factor behind offshoring, CIOs must internalize the "cost-versus-risk equation", says Ian Marriott, research vice president at Gartner. When going offshore, common risks (infrastructure stability, process maturity, security) become more conspicuous, and uncommon risks (human resource predictability, political stability, rule of law or lack thereof) emerge. Increased competition for the offshore outsourcing dollar promises to raise standards around the globe, but more opportunity equals more risk, and choosing a location is an increasingly complex decision - one we're hoping the "2006 Global Outsourcing Guide" will help you make.
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