Outsourcing Trends for 2007

India will remain on top, but other countries and cities will show up on the radar.
January 5, 2007

By Kalpana Shah



Business transformation will drive global companies to seek out a greater degree of technology outsourcing in the year ahead, according to two consulting firms.



neoIT, a San Mateo, California-based consulting firm specializing in services globalization, released a research note Friday predicting several trends that will dominate the outsourcing world in 2007.



Several of neoIT’s predictions echoed those of Tholons, a Washington, D.C.-based investment, advisory, and management firm, which released its forecasts last month.



Both firms predict that M&A activity will increase this year, with outsourcing services companies buying consulting firms or those firms that have local knowledge in the countries where their customers reside.



Similarly, companies from developed countries will buy firms in countries like India, the Philippines, and Russia to gain access to lower-cost talent.

Cities such as Prague, in the Czech Republic; Halifax, Canada; Budapest, Hungary; Warsaw, Poland; Pune, India; and Bucharest, Romania have already become centers for outsourcing, but they are becoming more expensive and less differentiated.



As a result, other cities such as Bratislava, Slovakia; Ho Chi Minh City, Vietnam; Kolkata, India; Xi’an, China; Buenos Aires, Argentina; Krakow, Poland; Colombo, Sri Lanka; Dubai, United Arab Emirates; and Sofia, Bulgaria are on their way to becoming centers of outsourcing in 2007, according to the study from Tholons.



neoIT, however, predicts that top cities such as Bangalore, New Delhi, and Chennai—all in India—will continue to attract new companies in 2007 despite rising costs.



Cities of Excellence

India will remain the top destination for IT services, but buyers will look for cities of excellence in other countries where they can leverage employee skills.



Tholons strongly feels that the year 2007 will be that of small and medium enterprises (SMEs), which will play a significant role in the services globalization arena.



Anticipating the next wave, private equity investors will invest up to $5 billion in the Indian market to fund the expansion plans of business process outsourcing (BPO) and knowledge process outsourcing firms, predicted CEO Avinash Vashistha.



While not mentioning SMEs, neoIT thinks existing BPO firms will scale up the value chain by providing a layer of analytics on top of the work they already do, such as managing payroll and other human resources functions.



Both firms’ reports refer to the coming wave of outsourcing contract renewals. Tholons predicts that many large contracts will be carved into several pieces, with buyers opting for the best-of-breed approach in selecting service providers.



Countries such as the Philippines will see increased BPO activity while the high-tech Russian outsourcing industry will grow 40 percent next year. A country like Sri Lanka, offering cost-effective financial services, will see huge traction from buyers, according to the Tholons study.



The neoIT research brief also predicts that billing rates by top suppliers such as Accenture, IBM, Wipro, and Infosys will increase by 2 to 3 percent due to the growing demand for skilled resources, a rise in wages, and increased overhead incurred in maintaining quality or ensuring tight security.