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IT Offshoring Industry Analysis, April 2007

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An analysis of the IT offshoring industry

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IT Offshoring Industry Analysis, April 2007

  1. 1. IT Offshoring Industry Analysis A cursory view into the global offshoring market Global players, global delivery By Peter Louis April 2007 © 2007 Peter Louis. All Rights Reserved
  2. 2. Contents IT offshoring overview © 2007 Peter Louis. All Rights Reserved 2
  3. 3. What is IT offshoring IT offshoring is the outsourcing of an IT task, function or service such that the task, function or service is performed offshore in another country. Note. Various other terms in use include offshore IT outsourcing (offshore ITO), ITO offshoring, global sourcing and global delivery. Source: SearchCIO.com © 2007 Peter Louis. All Rights Reserved IT offshoring overview 3
  4. 4. Global IT offshoring market forecast comparison Global IT offshoring market forecast 3% CAGR 200 180 180 160 150 140 Addressable 37% CAGR Market $US 120 Billions Market 100 Expenditure 80 72 60 40 15 20 0 2005 2010 Year Source: McKinsey, 2006 © 2007 Peter Louis. All Rights Reserved IT offshoring overview 4
  5. 5. IT offshoring overview What are the drivers behind IT offshoring? © 2007 Peter Louis. All Rights Reserved 5
  6. 6. Drivers behind IT offshoring Growth rate of offshoring drivers over time, 2004 – 2006 90 "Very Important" or "Important" 80 Cost Reduction % of Firms Citing Drivers as 70 Access to Qualified Personnel 60 Competitive Pressures Business Process Redesign 50 Increased Speed to Market 40 30 20 Access to New Markets 10 0 2004 2005 2006 Survey Year Source: Offshoring Research Network (Duke University), 2007 © 2007 Peter Louis. All Rights Reserved IT offshoring overview 6
  7. 7. Drivers behind IT offshoring Growth rate of offshoring drivers over time, 2004 – 2006 90 "Very Important" or "Important" 80 Cost Reduction % of Firms Citing Drivers as 70 Access to Qualified Personnel 60 Competitive Pressures Business Process Redesign 50 Increased Speed to Market 40 30 20 Access to New Markets 10 0 2004 2005 2006 Survey Year Source: Offshoring Research Network (Duke University), 2007 © 2007 Peter Louis. All Rights Reserved IT offshoring overview 7
  8. 8. Risks associated with IT offshoring Perceived risks of offshoring, 2004 – 2006 60 Operational Challenges "Very Important" or "Important Lack of Acceptance by 50 Internal Clients % of Firms Citing Risk as Loss of Managerial Control 40 Lack of Acceptance by Customers 30 Cultural Differences Political Backlash 20 Political Instability 10 0 2004 2005 2006 Survey Year Source: Offshoring Research Network (Duke University), 2007 © 2007 Peter Louis. All Rights Reserved IT offshoring overview 8
  9. 9. Risks associated with IT offshoring Perceived risks of offshoring, 2004 – 2006 60 Operational Challenges "Very Important" or "Important Lack of Acceptance by 50 Internal Clients % of Firms Citing Risk as Loss of Managerial Control 40 Lack of Acceptance by Customers 30 Cultural Differences Political Backlash 20 Political Instability 10 0 2004 2005 2006 Survey Year Source: Offshoring Research Network (Duke University), 2007 © 2007 Peter Louis. All Rights Reserved IT offshoring overview 9
  10. 10. Contents Industry analysis © 2007 Peter Louis. All Rights Reserved 10
  11. 11. Industry analysis Who are the players? © 2007 Peter Louis. All Rights Reserved 11
  12. 12. Global IT outsourcing 2006 vendor shares, Big Six – the incumbents $4.1 $5.4 $17 In 2006, Big Six earned a total of $54.6 billion from IT outsourcing $7 deals And cornered 75% of the market $3.2 $17.9 Note: Accenture’s ITO revenues are estimated at 60% of total outsourcing revenues Source: SEC fiscal year 2006 10-K filings © 2007 Peter Louis. All Rights Reserved Industry analysis 12
  13. 13. Global IT outsourcing 2006 vendor shares, Big Six – the incumbents $4.1 $5.4 $17 In 2006, Big Six earned a total of $54.6 billion from IT outsourcing $7 deals And cornered 75% of the market $3.2 $17.9 Note: Accenture’s ITO revenues are estimated at 60% of total outsourcing revenues Source: SEC fiscal year 2006 10-K filings © 2007 Peter Louis. All Rights Reserved Industry analysis 13
  14. 14. 2006 best managed global IT outsourcing vendors, top 10 – which includes 8 new contenders Big ITO wins in 2006, high standards, highest CSS scores GM awarded more than $700m in IT services contracts over a 5-year period Source: sourcingmag.com, 2006 © 2007 Peter Louis. All Rights Reserved Industry analysis 14
  15. 15. 2006 best managed global IT outsourcing vendors, top 10 – which includes 8 new contenders Pioneered offshore development centre model for software delivery Agile, fast moving, strong track Big ITO wins in 2006, high record of delivering business results standards, highest CSS scores Crossing over to $2b in annual revenue Well-established, structured Received 2006 ITO Excellence methodologies grew income 38% Award for work with Vanguard Car Rental Indian pioneer, Fortune Top 10 companies among TCS’ valued customers Ranked #1 among the world's speciality offshore infrastructure service providers GM awarded more than $700m in IT for two consecutive years services contracts over a 5-year period Revenue up 33% with outsourcing comprising > 38% of total revenue base Source: sourcingmag.com, 2006 © 2007 Peter Louis. All Rights Reserved Industry analysis 15
  16. 16. Industry analysis Where is offshoring taking place? © 2007 Peter Louis. All Rights Reserved 16
  17. 17. Offshoring locations, top 5 – the incumbents China Thailand India Malaysia Brazil Source: AT Kearney, 2007 © 2007 Peter Louis. All Rights Reserved Industry analysis 17
  18. 18. Offshoring locations, top 5 plus 9 new contenders Russia Poland China Czech Republic Thailand Tunisia Mexico Philippines Egypt India Malaysia Brazil South Africa Indonesia Source: AT Kearney, 2007 © 2007 Peter Louis. All Rights Reserved Industry analysis 18
  19. 19. Industry analysis What do decision makers want to offshore? © 2007 Peter Louis. All Rights Reserved 19
  20. 20. Functions likely to be outsourced over next 12 months Buyer spending plans PC Maintenance & Support Network Management Data Centre Management Server Management Web Hosting Onshore Database Management Offshore Help Desk Application Maintenance & Support Application Development Low Relative Focus High Source: Diamond, 2006 © 2007 Peter Louis. All Rights Reserved Industry analysis 20
  21. 21. Industry analysis And who are the decision makers? © 2007 Peter Louis. All Rights Reserved 21
  22. 22. The corporate officers most likely to drive the IT outsourcing decision IT outsourcing decision makers VP Sales Ops Mgr CEO COO VP Ops CFO IT Manager VP IT CIO Low Relative Focus High Source: Diamond, 2005 & 2006 © 2007 Peter Louis. All Rights Reserved Industry analysis 22
  23. 23. Companies who have offshored Note: This sample is for illustrative purposes only Source: InformationAge 2007; Silicon.com, 2006; InformationWeek, 2006 © 2007 Peter Louis. All Rights Reserved Industry analysis 23
  24. 24. Companies who have offshored, have partnered with Note: This sample is for illustrative purposes only Source: InformationAge 2007; Silicon.com, 2006; InformationWeek, 2006 © 2007 Peter Louis. All Rights Reserved Industry analysis 24
  25. 25. General offshore ITO trends over the coming years • Emerging outsourcing centres • Service providers will continue to standardise, - Philippines, Mexico, Russia, C Europe, Vietnam & industrialise & leverage pre-configured offerings Malaysia will attract work at the expense of India - By 2008, 50% of new deals will include IT utility • Remote Infrastructure Management Outsourcing component with infrastructure generating most growth to exceed other infrastructure outsourcing interest from buyers & investment from providers models - By 2008, more than 70% of new application utility - Global market valued at $8 billion by 2010 offerings targeted at business units/ line managers - From 2005, market will grow by CAGR of 61% - Business process utility, a major evolution of BPO • Global delivery – use of IT labour continuing at a where highly standardised business processes run rapid pace with vigorous competition on a unified one-to-many technology platform - Global sourcing moving beyond search for cheap • Deal size, structure and complexity labour to more complex deals - Offshore pure players invited to bid on deals > $30 - Pressure to reduce costs and improve profits million; deal sizes getting smaller - Offshore providers seeking to better serve - Deals have more complex terms & conditions, prospective clients by acquiring front-end penalties & incentives and multi-sourcing strategies capabilities and consultancies as market matures, deals are being shared • Nearshoring • Maturing market leads to convergence/collision - Risk adjusted cost/benefit assessment continues to - Players, like telecommunication and financial drive some buyers into the nearshore market services providers, have blurred the distinction between IT and business services Source: neoIT, 2006; Everest, 2007; Gartner, 2005; Tholons, 2007 © 2007 Peter Louis. All Rights Reserved Industry analysis 25
  26. 26. Disclaimer The information presented has been prepared using sources believed by the author to be reliable and accurate. However, the author makes no warranty or assumes any legal liability or responsibility for the accuracy or completeness of any information presented. Moreover, the author accepts no responsibility for the decisions made by readers. © 2007 Peter Louis. All Rights Reserved IT offshoring overview 26
  27. 27. IT Offshoring Industry Analysis A cursory view into the global offshoring market Global players, global delivery By Peter Louis April 2007 © 2007 Peter Louis. All Rights Reserved
  28. 28. Attachments Attachments © 2007 Peter Louis. All Rights Reserved 28
  29. 29. 2006 best managed global IT outsourcing vendors, top 10 includes 8 new contenders Rank Vendor Est. 05 Note Rev 1 ACS $4.4b 2006’s top ITO contract, high standards, highest CSS scores 2 Satyam $1.1b Pioneered offshore development centre model for software delivery 3 Cognizant $886m Agile, fast moving, strong track record of delivering business results 4 Perot Systems $2b Awarded for superior ITO services 5 Infosys $2.2b Crossing over to $2b in Annual Revenue 6 Patni $450m Well-established, structured methodologies grew income 38% 7 TATA Consulting $2.9b Indian pioneer. Fortune Top 10 companies among TCS’ valued customers 8 HCL $757m Ranked #1 among the world's specialty offshore infrastructure service providers for two consecutive years 9 Hewlett Packard $86.7b GM awarded more than $700m in IT services contracts over a 5-year period 10 Capgemini $6.9b Revenue up 33% with outsourcing comprising > 38% of total revenue base Source: Sourcingmag.com, 2006 © 2007 Peter Louis. All Rights Reserved Attachments 29
  30. 30. Principal offshoring locations, top 5 – the incumbents Country Differentiation / competitive disadvantage Locations India English language skills & conducive business Bangalore, Chennai, Mumbai, Pune, environment; low-cost, high volume of highly skilled IT Kolkota, Gurgaon labour; urban infrastructure; attrition to US/Europe China High volume of highly skilled IT labour; lack western Shanghai, Dalian, Xi’an, Shenzhen, language skills; culturally distant from West; deficient IP Chengdu rights protection; favoured destination for Japanese firms Malaysia English/Chinese language skills, Western business Kuala Lumpur, Cyberjaya and practices; low-cost, highly skilled IT labour; robust Putrajaya infrastructure (e.g., “Multimedia Super Corridor”); government incentives Thailand English/Japanese language skills; low-cost, large volume Bangkok of highly skilled IT labour, robust high-tech infrastructure; favourable government incentives Brazil Low-cost, large pool of highly skilled IT labour; cultural Sao Paulo, Rio de Janeiro, Belo affinity with US/West; favourable time-zone for US; near- Horizonte shore alternative for N. America Source: AT Kearney, 2007 © 2007 Peter Louis. All Rights Reserved Attachments 30
  31. 31. Emerging offshoring locations – 9 new contenders Country Differentiation / competitive disadvantage Locations Indonesia Large volume of low-cost IT labour; English language Jakarta skills; low cost; western language skills Philippines Very good English language skills, cultural affinity with US; Manila large volume of low cost IT labour Mexico US policies encourage investment; cultural ties to US; Mexico City provides low-cost nearshore alternative for US market Egypt High volume of engineering/IT graduates per year; English Cairo, Giza, Alexandria language skills, vicinity to Europe Czech Rep Foreign language skills; IP rights protection; preferred Prague nearshore alternative for W. European firms Poland Large pool of IT labour; low wages encourages migration; Krakow, Wroclaw, Warsaw European firms preferred nearshore alternative Tunisia Low cost IT labour; French language skills; nearshore Tunis alternative for French-speaking Europe South Africa Very good English skills; cultural affinity with West; Cape Town Western business practices; low cost skilled IT labour Russia Huge pool of highly skilled low-cost software engineers; Moscow, St Petersburg cultural & geographical proximity with West; strong government support; weak business environment Source: AT Kearney, 2007 © 2007 Peter Louis. All Rights Reserved Attachments 31
  32. 32. Outsourced services IT function Description Countries Application Custom and packaged software applications including India, Russia, Malaysia, Development enterprise-wide solutions such as SAP, PeopleSoft, Brazil, Czech Republic, Oracle and Siebel Israel, Thailand, Poland Application Maintenance & hosting of packaged software India, Malaysia, Czech Maintenance & Support applications including SAP, PeopleSoft, Oracle and Republic, Thailand, Siebel Singapore, Brazil, Russia, Poland Help Desk Desktop/client applications such as MS Office, Lotus India, Philippines, Czech Notes, Internet Explorer, Windows XP, Microsoft Access, Republic, Egypt PC & network security Database Management Includes database software maintenance & India, China, Russia, configuration, monitoring & problem resolution and Thailand, Philippines, security management for Oracle, UDB, MySQL, SQL Malaysia, Brazil Server Web Hosting Hosting of client websites & Intranet, site maintenance & India, Malaysia, support, traffic monitoring Philippines Source: Diamond, 2006 © 2007 Peter Louis. All Rights Reserved Attachments 32
  33. 33. Outsourced services, cnt’d IT function Description Countries Server Management Automated server monitoring & resolution, server India, Malaysia, performance management, server administration; server Singapore backup & restore management, email administration, enterprise application administration Data Centre Management of core IT operations, hardware (AS/400s, India Management IBM m/f, UNIX boxes), software (MVS TSO/ISPF, CICS, DB2), and personnel (operators, system analysts) Network Management Network management of LAN/WAN, network support, India, Singapore, 7x24x365 network monitoring and notification, traffic Malaysia analysis, problem resolution, device management & service PC Maintenance & Virus removal, software installation, data recovery, India Support hardware replacement, software/hardware upgrades Source: Diamond, 2006 © 2007 Peter Louis. All Rights Reserved Attachments 33
  34. 34. Companies who have offshored Company Provider Offshore ITO service lines Ricoh Satyam Software development (firmware applications that run copiers) Burger King MindTree Software development (Specification Supplier Management System) Volvo MindTree Software development and maintenance (dealer management system) Dixons HCL IT infrastructure support and software development, system development, application delivery, infrastructure support and maintenance Whitbread CSC Application support Threshers Xansa Applications management, IT operations and hosting for Threshers' SAP financials, WebSphere, Business Objects and JDA merchandising applications. Somerfield Tata IT helpdesk, IT infrastructure, servers and networks Barclays Accenture Software development and support Source: InformationAge 2007; Silicon.com, 2006; InformationWeek, 2006 © 2007 Peter Louis. All Rights Reserved Attachments 34
  35. 35. Pound equivalents for selected items Item Slide Pound equivalent Global IT Offshoring Market Forecast: 2010 addressable market size 4 £107 billion Global IT Offshoring Market Forecast: 2010 market expenditure 4 £43 billion Global IT outsourcing 2006 vendor shares, Big Six – the incumbents: Earnings 10 £32 billion Note: £1 = US$1.6682, average exchange rate from 3 Jan 2000 to 18 Apr 2007 Source: Federal Reserve Board © 2007 Peter Louis. All Rights Reserved Attachments 35
  36. 36. Pound equivalents for selected items Item Slide Pound equivalent Global IT Offshoring Market Forecast: 2010 addressable market size 4 £107 billion Global IT Offshoring Market Forecast: 2010 market expenditure 4 £43 billion Global IT outsourcing 2006 vendor shares, Big Six – the incumbents: Earnings 13 £32 billion Note: £1 = US$1.6682, average exchange rate from 3 Jan 2000 to 18 Apr 2007 Source: Federal Reserve Board © 2007 Peter Louis. All Rights Reserved Attachments 36

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