IT Outsourcing Survey: Provider Profits Shrink, Growth Slows in India

IT outsourcing providers heavily invested in India could be caught flat footed as growth moves to other countries and competition heats up for both commodity and innovation work, according to Duke University's annual offshoring survey.

By Stephanie Overby
Tue, October 11, 2011

CIO — Established IT outsourcers are getting squeezed at both ends of the competitive spectrum. According to the annual offshore outsourcing survey conducted by Duke University's Center for International Business Education and Research (CIBER) and PwC, incumbent India-based and U.S. IT service providers are under pressure from outsourcing upstarts in other countries that are stealing market share from them and from existing clients demanding price reductions.

Meanwhile, Indian and American IT outsourcing providers are entering new markets with both low-end, commoditized services—a highly competitive field with few barriers to entry—and higher-end services where market entry is more challenging, say the researchers. It all adds up to a perfect storm for many large IT outsourcers, says Arie Lewin, director of CIBER and professor of strategy and international business.

The survey of 620 service providers from 50 countries revealed that all providers, regardless of size, reported a decline in profit margins between 2009 and 2010. Large providers experienced the biggest decrease, from an average 23 percent profit in 2009 to 18 percent in 2010.

Indian providers in particular have been struggling with profit erosion for a longer period of time, according to the research. Their profit margins dropped from 25 percent in 2007 to 20 percent in 2009 to 17 percent in 2010.

The study also revealed an uptick in "nearshoring," with service providers expanding operations to move closer to their clients.

The shift away from India—the offshore outsourcing center of the universe—isn't happening overnight, however. Less than five percent of U.S. companies were moving work from India to another country, and two percent were relocating work from India to the U.S.

But new IT outsourcing activity in India has slowed. "India still has major market share," Lewin says, "but the growth rate of new commercial deals between 2010 and 2011 shrunk by around 60 percent."

Shrinking growth could mean trouble for the IT outsourcers who made large investments in the country. "U.S. firms may be saddled with the legacy effect of early offshore locations in India before closer Latin American locations were established," Lewin says.

Lewin was surprised by the intensity of global competition in the offshore outsourcing industry that this latest study revealed. "Countries [are] aspiring to emulate the success of India and are adopting national policies for attracting the business services outsourcing industry," Lewin says. "China is one example. But other countries such as Chile also recognize that attracting the business services outsourcing industry can be an important new lever of economic development."

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