Outsourcing Trends of 2006

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A detailed overview of business outsourcing trends for the year 2006.

2006 was a profitable year for Indian outsourcing giants TCS, Infosys, and Wipro (all three of which reported high-profile deals and double-digit profit growth). As usual, the outsourcing industry continues to thrive despite controversy and consumer resistance; however 2006 also saw some changes in the industry, many of which indicate that the industry is coming into its maturity. Following are some of the major trends in the outsourcing industry in 2006.

Outsourcing goes global. India has dominated the market from the industry's birth. 2006, however, saw increasing globalization, with overseas call centers opening in Malaysia, China, the Philippines, Central and Eastern Europe, Mexico, Brazil, and many other locales. While India used to receive around 80% of all outsourcing revenue, it now earns only around 59% of the market. Indian outsourcing companies are themselves opening divisions in other countries, and country boundaries are becoming less and less meaningful as the industry evolves.

China could be the next India--and the next Silicon Valley. China has been growing significantly in the outsourcing industry, particularly in 2006. In terms of cost, resources, low wages, and educated workers, it is considered the country most equipped to challenge India's domination of the market. China's technology industry is advancing at a rapid pace enabling them to challenge dominant U.S. companies in the near future. Moreover, Information Week reported in a December 12th article, "China to Challenge India As Top Outsourcing Destination," that Chinese government has earmarked 10 cities, including Shanghai, Dailian, Shenzhen, and Chengdu "for development as major outsourcing centers in a bid to capture a greater share of the tech work that western multinationals are farming out to India and other low-cost destinations…."

Outsourcing continued to grow--despite controversy. Undercover stings by U.K. reporters uncovered an unsettling underside to the Indian call-center industry: lax security of customer data. Reporters managed to uncover criminal rings that sold data from millions of customers accessed from Indian call centers. As a result of this, many companies pulled out of the Indian call center industry over the last year, but in spite of this, many large companies moved their call centers to India last year (including HSBC, which made plans in 2006 to open a 2,000-seat call center facility in Kolkata).

Multi-sourcing is the new buzzword. 2006 saw many businesses outsourcing different technological needs to many different outsourcing companies instead of bundling all their outsourcing needs into a single deal with a larger company. This led to fewer high-profile deals in outsourcing, although the industry itself continued to grow. At the same time, the largest sole source outsourcing deal was awarded in late 2006 to India's Tech Mahindra, a $1 billion deal to provide tech support to British Telecom and its business customers. BT owns a 35% stake in Tech Mahindra, and the two have worked together for the past 20 years.

Dual Shoring. "2006 also saw the rise in dual shoring arrangements as more and more organizations come to understand that cheaper and more plentiful skilled offshore labor is not necessarily a complete replacement for in-house resources," said Mark Wesker, CEO of Artifact Software. "Instead, organizations are having to adapt business processes to have onshore and offshore resources working more collaboratively and collectively to achieve business objectives. Throwing business processes over the wall to seemingly cheaper outsourced resources, without a dual shore strategy, often results in a failure to achieve the cost savings and time to market objectives that motivated the decision to offshore in the first place."

Fewer labor disputes. 2006 saw fewer contract problems, delivery failures, job loss struggles with unions, and other disputes than in previous years. Many experts believe that this suggests the industry may be maturing as both buyers and suppliers gain in experience.

Consumers aren't pleased. Despite the industry's growth and coming maturity, consumer reports suggest that customers still see outsourcing in a negative light. There is no doubt that this is due to job losses that receive significant media attention; however the cost savings and operational efficiencies businesses can incur by moving many of their operations offshore, appears to be too tempting to resist despite consumer ire.

Predictions for 2007 suggest that the globalization trend will continue, and more high-skill jobs will move offshore as the industry grows. There is still plenty of debate among American and U.K. businesses over whether or not outsourcing is a positive trend, but there is no doubt that whether positive or negative, it's here to stay.

About Artifact Software

Artifact provides the market leading software development management system Lighthouse, enabling companies to effectively manage, monitor and measure software development. Whether outsourcing, offshoring or managing distributed teams, Lighthouse enables organizations to achieve total visibility and control over the software development process. Artifact is a private company based in Baltimore, Maryland. Investors and Board members include Intersouth Partners, New Markets Growth Fund, Draper Atlantic, Ray Oglethorpe, former President of America Online and John Burris, Senior VP of Sales & Services, Citrix. For more information, please visit http://www.artifactsoftware.com.

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