Cost Savings and Business Reform Drive Verticals' Offshoring Growth
IDC's recent study "U.S. Offshore IT Services Market 2005-2009 Forecast by Vertical Markets" reveals that the verticals banking, telecommunications, and healthcare will lead all other verticals in outsourcing spending, and that this market will grow 13 to 14 percent over the next five years. The study looked at vertical market spending by companies outsourcing segments of their business operations to offshore players, such as Infosys Technologies and Wipro, only. U.S.-based service providers like Accenture, Deloitte, and IBM BCS, were not included. Jason Spaulding, research analyst in the vertical market group at IDC, says this increase can be attributed to a number of factors--cost savings being the primary driver. "Those industries leading this market are the most comfortable with outsourcing, and therefore are really looking to drive down their costs through offshoring."
Spaulding cites as the other leading driver the pressure to models. Industries like healthcare are constantly looking for ways to increase customer satisfaction while improving workflow and business process. "The healthcare industry is under increasing pressure to lower its costs while decreasing medical errors. They're turning to offshore providers to help them do that."
ABN Amro, for example, a Dutch financial services company, announced that it is spending $2 billion in IT contracts to a group of five Indian outsourcers. I what analysts say this is the largest IT outsourcing deal ever, approximately 3,200 jobs will be cut. ABN says it hopes to save about $258 million per year. The deal, Spaulding says, is one that "generally represents what we're seeing in offshoring in the financial services sector." Without knowing the details, he says "this is a company looking to cut costs and reform their businesses model via an offshore service provider."
IDC stresses that for companies providing these services, success will rest on the ability to comprehend how hardware-, software-, and solutions-spending priorities differ by industry, as well as on understanding how firms in select industries can deploy and benefit from their services. David Tapper, director of IT outsourcing, utility, and offshore services, says that leveraging "offshore as part of a vertical to/to-market strategy will require aligning key drivers of offshore, whether [they] be cost savings or the need to enter new markets, with key uses of offshore or nearshore...and customer preferences related to having local presence. Ensuring alignment of these critical factors will enable providers to enhance their position in winning business from customers."
Spaulding agrees: "To avoid costly mistakes and maximize available revenue, vendors must intelligently choose industries in which to expand or extend focus."
IT and BPO Contract Sizes Decline
The Telecom Industry Leads the Outsourcing Surge