Tuesday, October 13, 2009

Offshoring - increased competition amongst service providers is leading to more innovation

[McKinsey Q] Despite the global downturn, the IT offshoring and outsourcing industry has continued to grow, though at a slower pace. The recession’s main effect has been heightened competition among the hundreds of IT service providers that handle a variety of tasks for global corporations. Now, a small group of winners is emerging from the fray, threatening to erode the offshore franchise of many Tier-1 and Tier-2 suppliers in countries such as India, the Philippines, and Russia.

Our 2008–09 survey of the global IT offshoring and outsourcing industry—covering 200 relationships among companies in Asia, Europe, and North America, including 65 of the Fortune 200—shows that these rising suppliers have had a broad impact. In fact, they are redefining many traditional management practices; changing the long-standing model for contracting offshore services, by focusing on the quality of services delivered rather than the usual benchmarks of costs per offshore hire; collaborating with clients in new ways; and gaining more control over outsourcing strategies.

What’s more, our results show that this new group of IT service providers is developing the broader and deeper pools of talent that global clients increasingly demand and using progressive techniques to manage and retain these workers. Perhaps that’s why such companies had the highest rankings for overall client satisfaction and employee retention in our survey, logging high scores across their entire client base and showing a consistent year-on-year improvement. By contrast, clients thought that most of the other established Tier-1 and Tier-2 companies were just doing an “average job,” and their performance isn’t improving. In another major shift, they can no longer win bids solely by differentiating on price, since almost all suppliers are now cost competitive.

How innovators are changing IT offshoring

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