Outsource or own it?
July 17, 2009
The biggest dilemma before IT companies now is whether to run their own captive offshore development centres, or enter into strategic deals with 3rd party local vendors.
The outsourcing landscape is changing. While earlier the temptation was to run and maintain one’s own offshore development centre at a low-cost country for wielding full control over the cost structure, the new economics has shifted the trend back leaving the non-core to a third party vendors who may be more adept at the job.
Last year, Citi sold Citigroup Global Services with offices in Mumbai and Chennai to TCS for a reported $505 million. Simultaneously, it entered into a nine-and-a-half year, $2.5 billion service contract with TCS on one hand, and with Wipro on the other, under a second, six-year, $500 million pact. The reason for this is not difficult to guess.
When corporates are firefighting for survival, they don’t want to be bothered with routine administrative chores, even if it saves them a few pennies. Examples of corporates who have let go of their offshore development centres for this primary reason include AOL, Aviva, Prudential UK and Philips. In recent months, all these companies have put their offshore IT and business process services subsidiaries on the block..
“Captive centers are difficult to manage and quite a distraction from a company’s core business,” David Rutchik, a partner with outsourcing consultancy Pace Harmon confessed to Computer World’s Stephanie Overby, recently.
Even earlier, a bulk of IT work was always landing with third parties vendors. Only a minuscule percentage of big players who were already established in the local market chose to run their own offshore units. This trend is likely to continue, indicates Phaneesh Murthy, CEO, iGate, in an interview to Hindu Business Line.
According to Gartner, captive centers represent a large, fixed cost for companies-and one that has been growing due to inflationary pressures and exchange rate fluctuations.
Another Gartner Report predicts a 5-20% drop in outsourcing services cost in 2009-10. If that happens, it’s likely to further drive business in favor of third party vendors.
And why not? If the whole rationale to outsourcing is that it farms out the non core activities to another, while leaving a business to concentrate on what it does best , and especially if this non-core is the “core” of the third party vendor — why not?
The bottomline is that in a mature market, where competencies have developed to acceptable levels, offshore captive centers have outlived their utility.
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Well said Great information, keep up the great work!
In this economic conditions it is safe to use outsource vendors rather than building captive centers in offshore locations..