Bernstein Research and Everest Research Institute Report Finds IT Services Providers Most Aggressively Using Offshore Capabilities Achieve Higher Margins and Stronger Growth Than Slower Offshore Adopters
Study Anticipates 30 Percent Growth in Offshore Outsourcing Demand Over Next Three Years, While Traditional IT Services Providers Face Challenge of Increasing Offshore Capabilities
Jun 28, 2005
Though offshore outsourcing represented just three percent of the $725 billion spent on global IT services in 2004, it is increasingly becoming the key to fundamental supplier economics, according to the findings of a new joint study by Bernstein Research and Everest Research Institute. The report, "Is Offshoring Demand Sustainable?," found that offshoring, more than any other factor, is driving growth and profitability among the large IT outsourcing services providers - raising the question of whether the traditional IT services providers that have yet to fully embrace offshoring as part of their service offering should step up their investment in these capabilities.
In a detailed analysis of the world's major IT services providers, Bernstein Research and Everest Research Institute grouped the major outsourcing suppliers into three categories based on their level of offshore adoption: Indian pure plays, such as Wipro, Infosys and Cognizant, for which the majority of employees are located offshore; aggressive offshore adopters, such as Sapient, Perot, and ACS, that have been relatively early adopters of offshore labor; and traditional players, such as IBM Global Services, EDS and CSC, with a comparatively small, though growing, percentage of their work staffed in offshore locations. The analysis found that:
-- Pure plays achieve higher margins: In 2004, net margins of the top six Indian suppliers averaged 22 percent, compared to only 4 percent for six major traditional suppliers.
-- Pure plays benefit from higher free cash flow: The top six Indian players combined generated nearly $1 billion in free cash flow in the past year, which is essentially equal to the aggregate cash flow of the six major traditional players, excluding Accenture.
-- Pure plays are growing faster: The top Indian suppliers are growing revenues at an annual rate of nearly 40 percent, while the major traditional suppliers are growing at only 3 percent.
"Why aren't traditional suppliers growing as fast or as profitably as the pure plays and aggressive adopters of offshoring?" said Peter Bendor-Samuel, CEO of Everest Research Institute. "Our findings are a wake-up call to traditional IT services providers. We think that the traditional suppliers are missing out on an important economic opportunity and need to make a much stronger commitment to building their offshore capabilities in the near term."
The report also found that 30 percent growth in offshore outsourcing demand is sustainable for the next three years. "Those who downplay the size of the offshore market and dub it as a commodity business are really missing the boat," said Rod Bourgeois, Senior Research Analyst, Computer Services & IT Consulting, Bernstein Research. "Offshoring is having an enormous impact on industry economics. This will only continue as offshore demand over the next several years is supported by a strengthening value proposition and multiple industry trends." These trends include the "re-bundling" of large-scale outsourcing contracts and a shrinking supply of IT talent onshore, prompting buyers to look offshore for talent and new contract structures, according to the Bernstein Research-Everest Research Institute findings.
In a detailed analysis of the world's major IT services providers, Bernstein Research and Everest Research Institute grouped the major outsourcing suppliers into three categories based on their level of offshore adoption: Indian pure plays, such as Wipro, Infosys and Cognizant, for which the majority of employees are located offshore; aggressive offshore adopters, such as Sapient, Perot, and ACS, that have been relatively early adopters of offshore labor; and traditional players, such as IBM Global Services, EDS and CSC, with a comparatively small, though growing, percentage of their work staffed in offshore locations. The analysis found that:
-- Pure plays achieve higher margins: In 2004, net margins of the top six Indian suppliers averaged 22 percent, compared to only 4 percent for six major traditional suppliers.
-- Pure plays benefit from higher free cash flow: The top six Indian players combined generated nearly $1 billion in free cash flow in the past year, which is essentially equal to the aggregate cash flow of the six major traditional players, excluding Accenture.
-- Pure plays are growing faster: The top Indian suppliers are growing revenues at an annual rate of nearly 40 percent, while the major traditional suppliers are growing at only 3 percent.
"Why aren't traditional suppliers growing as fast or as profitably as the pure plays and aggressive adopters of offshoring?" said Peter Bendor-Samuel, CEO of Everest Research Institute. "Our findings are a wake-up call to traditional IT services providers. We think that the traditional suppliers are missing out on an important economic opportunity and need to make a much stronger commitment to building their offshore capabilities in the near term."
The report also found that 30 percent growth in offshore outsourcing demand is sustainable for the next three years. "Those who downplay the size of the offshore market and dub it as a commodity business are really missing the boat," said Rod Bourgeois, Senior Research Analyst, Computer Services & IT Consulting, Bernstein Research. "Offshoring is having an enormous impact on industry economics. This will only continue as offshore demand over the next several years is supported by a strengthening value proposition and multiple industry trends." These trends include the "re-bundling" of large-scale outsourcing contracts and a shrinking supply of IT talent onshore, prompting buyers to look offshore for talent and new contract structures, according to the Bernstein Research-Everest Research Institute findings.