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| Move to offshoring offsets client rate cuts: Forrester |
| BS Reporter / Mumbai Oct 17, 2009, 00:08 IST |
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The ability of information technology companies to shift more staff offshore (to India in this case) results in offsetting the 5-10 per cent rate cuts that most clients recently effected on the back of the global economic slowdown, according to a new Forrester report.
The report titled, ‘Assessing Your Onshore/Offshore Staffing Ratios’ by Forrester VP & Principal Analyst John McCarthy, states that the economic downturn has hit IT budgets full force.
“Our recent Enterprise IT Services Survey (North America & Europe, Q2 2009) shows that renegotiating IT services rates is the top 2009 priority of these firms. 80 per cent of the 931 respondents list it as their critical priority. And on average, we see clients getting actual reductions in the range of 4-7 per cent based on current rates, type of work, and volume of spend,” says McCarthy.
The report also highlights that due to the increasing scrutiny on budgets, clients are also increasingly moving to fixed price models from the traditional approach of hourly rates. For instance, Wipro saw a 33 per cent increase in the percentage of its revenues coming from fixed price engagements for the year ended March 31, 2009.
Nasscom president Som Mittal concurs that Indian IT companies, over recent quarters, have been focusing on shifting work offshore to reduce cost. “Yes. Our own observations reveal there has been a 6-7 per cent shift in fixed prices in two years and vendors have started taking ownerships themselves. Another 5-6 per cent shift has been seen from onsite to offshore. So, customers are giving flexibility to vendors of taking the ownership. The saving in this onsite-offshore shift is almost 50 per cent.”
McCarthy’s advice to such companies is to move beyond these short-term strategies and invest in better specifications and change management processes, which will enable them to move more work offshore and recognise the associated savings. “Historically, Forrester has seen clients move through four distinct stages in their offshore maturity; we call these stages Bystanders, Experimenters, Committed, and Full Exploiters. During this evolution, clients not only build up trust with their IT vendors, but more importantly for the offshore mix, they also mature and add more rigour to their specifications, incident management, and governance processes. This improved process acumen on the part of the client, coupled with the domain and tool investments of IT vendors, has increased the amount of work that can be sent offshore by 10 to 20 per cent over the past three years,” elaborates McCarthy.
Over the past four to six months, he says, analyst firms have seen a dramatic rise in the number of inquiries related to IT services’ governance best practices, specifically around the most cost-effective mix of onshore and offshore staff from IT suppliers. And Forrester research demonstrates that adjusting Onshore/Offshore ratios is the best way to increase savings.
The report also highlights that the newest service lines have a relatively high offshore ratio, once firms move beyond the initial pilot project work. For example, TCS claims its factory testing model enables clients to take as much as 82 per cent of the workload offshore.
Larger scale infrastructure projects like mainframe consolidation have a higher onshore requirement — 30 per cent— while steady state infrastructure management operations can have as much as 80 to 85 per cent of the work done out of locations like India or Malaysia. Vendors claim that as much as 95 per cent of the L1 support can be handled offshore and 70-80 per cent of L2 can be done remotely as well.
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