Outsourcing and Offshoring: From India to Eastern Europe

When we look at the output from our recent Services Marketing Budget Allocations and Trends survey, the picture we see is a very positive one—in spite of the uncertain economic outlook in many quarters. In fact, ITSMA members are predicting 18% growth in services revenue for the year ahead! At the first European Inner Circle Meeting of the year, we delved into why we’re seeing these optimistic growth forecasts given the current economic climate. One area we discussed was the continued growth we’re seeing in both near-shoring and off-shoring activity and the potential impact this trend could have on the overall forecast.

There’s been a lot of talk lately about the growth rate of Indian outsourcing companies, and a recent article in The Times suggested that rising costs and falling demand are causing the Indian technology boom to slow down. The threat of recession in the US has seemingly reduced demand for corporate IT projects, while the rise in value of the Rupee has weakened India’s cost-advantage—this second point almost suggests that the Indian IT companies are becoming victims of their own success.

These reports came about as the four largest Indian IT companies—Tata Consulting Services, Infosys Technologies, Wipro, and HCL Technologies—reported average sales growth of about 21% in Q3 ’07, compared with 50% in the same period ’06. For the last quarter to December ’07, they posted average net profits growth of roughly 18%, which is apparently the lowest since 2001. While these figures are clearly an indication of a slow down in growth, they still represent levels that I’m sure many of our members would be proud of.

You may wonder why I’m discussing the happenings of the Indian technology boom in the EuroNotes section of this newsletter, and the answer to that is quite simple: According to a piece of research by Computer Business Review, the 50 largest IT services providers are taking an increasingly diverse approach to global sourcing. With the Indian advantage being undermined by the rising economy and the increasing cost of the workforce, many suppliers are supplementing their Indian operations with delivery centres in other low-cost locations such as Eastern Europe.

As the third most popular sourcing location, 17 of the top 50 IT services companies have a direct presence in Eastern Europe, with much of the action taking place in Poland, Hungary, and the Czech Republic. These Eastern European offices provide helpdesk, infrastructure, and back-office processing support to central and western European clients. With this in mind, maybe in future years we will be asking whether the growth targets of our members in Eastern Europe are skewing the overall results of our budget survey—it’s certainly worth watching.

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