While industry pundits scramble to create buzzwords to demonstrate the growth and evolution of globalization, some core attributes remain constant. An executive within a Fortune 50 manufacturing firm stated it perfectly, “Among all the projects within the IT organization, including virtualization and applications, offshore provides the most predictable ROI.” Offshore is not always popular, nor is it always understood, but it remains the “best sure thing.”
The executive meant that offshore has a predictable impact on cost. Any IT project work that can be relocated offshore will nearly always yield cost savings over internal or domestic equivalents. Companies must be vigilant about conducting high-quality analysis and aggressively encouraging offshore adoption. Within those parameters, offshore remains largely unchanged.
Of course, many things have changed in the past ten years:
1) Geographies other than India have become increasingly credible;
2) Application implementation become a viable offshore service;
3) Infrastructure command centers are increasingly offshore;
4) Clients have become mature purchasers of offshore solutions; and,
5) A second tier of hundreds of smaller providers are reaching critical mass.
How Customers Changed
In the early days of globalization, customers craved the cost savings from offshore, most lacked the expertise or experience to migrate effectively. Vendors filled that gap by selling “solutions.” Clients have become increasingly sophisticated at creating and managing offshore facilities, internally (i.e., captive units) and outsourced. They understand how to disaggregate projects and how to divide the balance of work between onsite and offshore facilities.
Customers are also changing the types of providers. Rather than let a provider deconstruct the application processes, clients themselves are conducting this effort, usually called “disaggregation.” Each process is distributed across onsite and offshore facilities, based on a number of factors, including business integration, process maturity and the application environment.
The change to conducting this analysis internally feeds a change in the types of providers. An emerging class of providers is rapidly gaining market share, many now with revenues ranging from $100-500M. Forrester Research describes this niche as “tier two providers” and noted that they “can deliver more value through specialization.” Whether specialization is based on an industry (e.g., banking), business process (merger & acquisition), or customer experience (e.g., integrating with client teams), tier two vendors offer a different experience from traditional offshore. Moreover, tier two providers usually operate with leaner corporate overhead, allowing them to compete aggressively with prices for both offshore and onsite personnel. Some companies refer to this as getting “tier 1 talent at tier 2 prices.”
Offshore Vendor Tiers
Why the reference to tier 1 talent? The rapid growth among offshore providers led to an unfortunate, but unavoidable, shift away from the initial intentions from offshore providers. The founders intended to create a “kinder, gentler” type of service provider, but rapid growth and competitive pressures stripped away those ideals. Some of the more altruistic (or sometimes opportunistic) individuals founded new companies to sustain those ideals. These and many other companies comprise the hundreds of tier 2 vendors.
Between 2003 and 2004, the offshore providers challenged the business models and market share of outsourcing vendors and systems integrators. As we move into 2010, tier 2 providers will place increasing pressure on those offshore providers to compete at lower price points, to become more nimble and develop an ever increasing set of niche capabilities. While the tier 1 vendors will certainly remain strong, they will become acquirers rather than builders of emerging skills sets. Customers with highly defined requirements and strong management skills will purchase from a wide choice of offshore providers.