25% of 2010 IT spend was from first-time outsourcers

Bangalore: While the global economic downturn saw some big buyers of technology reducing their spends, it also bought about greater acceptance for outsourcing, bringing in a large number of first time outsourcers in the fold.

At least a fourth of the total technology spending in 2010 is expected to have come from these first-time outsourcers who farmed out services to mostly Indian players as cost reduction and driving efficiency became imperative. According to market research firm Datamonitor, on an average, IT services outsourcing results in savings of 15-20% for customers.

Fast food giant McDonald’s, chemical major BASF, publishing firm Reader’s Digest Association and Fonterra were some companies that outsourced work for the first time.

“Pressure on growing revenues and profits has resulted in companies looking for optimum solutions to lower their cost of operations, increase profitability and improve efficiencies,” says Ramchandra Naik, practice leader, company and market intelligence, Datamonitor India.

Ranging between large and small-size deals with potential to ramp up in the future, the new businesses cut across geographies and sectors. Says Rajiv Sodhi, chief customer officer at HCL Technologies, the size of the deals would be in the $20-50 million range and spread over for three to five years.

First-time outsourcers in the US would be small businesses that would not figure in the Fortune 1000 list. Sunrise sectors are also witnessing outsourcing action. “New industry segments like healthcare, utilities, media and entertainment are seeing a lot of traction in the US,” Sodhi added.

The central government also emerged as large source of new contracts as its e-governance drive gathered momentum in 2010. “IT majors have won some big deals from government agencies. Government IT services outsourcing contracts till November 2010 totalled $300 million against $122 million in 2009,” Naik said.

Europe is also witnessing a shift in outsourcing stance with more firms opening up to the idea. “In Germany, the labour laws do not favour outsourcing. But now there is greater awareness within the management of private sector companies as well as the government about its benefits,” B. Ramaswamy, President and MD of Sonata Software said.

For Sonata Software, 25-30% of new business in the first nine months of the current fiscal has come from companies new to outsourcing. Many believed that European firms prefer to send their jobs to near-shore locations. However, a Forrester 2010 report said more than 60% of European firms intend to send their work to India.

Companies from Middle-East are also taking the outsourcing route mainly because Indian IT players can provide a higher level of expertise.

IT firms turning business solutions provider rather than just an IT services vendor, is also a big boost. A report by the Economist Intelligence Unit says the Middle East IT services market will reach $3.5 billion by 2011.

Says MindTree CEO Krishnakumar Natarajan: “Mid-size Indian players like us stand to gain from this trend. Companies, which are outsourcing IT services for the first time see us as a partner who can add greater value than being a thousandth customers of a large entity.”