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Friday, December 24, 2004

Offshoring Predictions - 2005

WSJ reports that more than 80% of the world's top 2,000 corporations will have established significant outsourcing operations overseas by the end of 2005 , as political opposition to the trend diminishes and the pressure to cut costs grows, according to a neoIT report. The report also says small and midsize businesses are increasingly looking to outsource services to India and other developing countries and that Japanese and European companies also are investing heavily in the offshore model.

"In the client market, U.S. companies will no longer be the dominant buyers as Western European firms create strong demand for offshore services," the report says. "We see acceptance for offshoring as a foregone conclusion for multinational corporations." Manufacturing, Health care and Retail sectors that particularly will embrace outsourcing more aggressively in 2005.India experienced sharp growth in the outsourcing of software and services during the fiscal year ended March 31. Software exports grew about 25% from a year earlier to $12.5 billion (9.33 billion euros), and back-office work generated nearly an additional $4 billion in revenue.

NeoIT, however, expects this growth to only accelerate next year, with software exports from India posting growth of around 25% to 30% and revenue from back-office work growing an additional 60%. "Deals involving business process outsourcing [BPO] work tend to be larger" than deals involving pure software. Even as India continues to grow, however, neoIT sees China, Russia, and a number of Eastern European and Southeast Asian countries also becoming large players in the outsourcing industry. Chinese firms will "make headlines" in 2005 by acquiring outsourcing companies as a means to generate growth, according to the report. Central and Eastern European countries, meanwhile, "will become increasingly credible markets for European clients."

The growth of the outsourcing industry will force global software and back-office companies to increasingly seek scale as a means to effectively compete. As a result, the consultancy expects a string of mergers and acquisitions in the coming year, as well as a number of stock-market listings by BPO firms. This will involve both multinationals buying out Indian firms, as well as the reverse. 2005 may see the first merger of a leading Indian supplier with a leading U.S. supplier.Despite the boom in outsourcing, firms still will face considerable challenges in successfully executing an offshore model
. More than 40% of the new offshore initiatives will fail to achieve the anticipated "savings, scale and risk diversification," neoIT says. "The key reason for these disappointments will not be due to supplier capability but buyer preparation and management," the report concludes. The trends noted here look quite consistent with what is felt in the marketplace.Key trends to note - Japan and Western Europe joining the bandwagon, BPO deals becoming larget than services deals and potential acquisition of Indian firms in 2005.

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