6 Offshore Outsourcing Hot Spots for 2010

CIO — Industry watchers predict an increase in offshore IT outsourcing in the new year. But 2010 is hardly expected to be a banner year for offshore outsourcing—better than 2009 but far from historic growth levels.

The headlines in offshore outsourcing in 2010 may focus less on the quantity of work organizations are sending overseas and more on where they're sending it. Leading companies will begin developing networks of offshore locations for outsourcing: They'll supplement contracts with vendors in more developed locales like India and the Philippines with new relationships in emerging markets in Latin America, Asia and Africa. Of course, "risk averse buyers will not venture too far afield in 2010," says Stan Lepeak, managing director of global research for EquaTerra.

"One of the key factors that will determine whether the growth can continue into the future is if the government encourages structural change in state-owned enterprises (SOEs)," says Melany Williams, partner and managing director of IT service provider consultancy TPI Momentum. "A tipping point will be when the Chinese government encourages the outsourcing of selected functions of the SOEs to local and foreign service providers." That, says Williams, will be a key indicator that China is entering a new level of outsourcing maturity.

In 2009, several Indian vendors went on shopping sprees and will now attempt to sell existing IT services to clients of the companies they've acquired. But that will require fundamental changes in their business models—most notably the need to do more local or onshore hiring, which could impact their bottom lines, notes Everest in recent research.

"Look for more geographic expansion by Indian heritage companies such as Infosys (INFY), Wipro, Cognizant (CTSH) and TCS into North America and the U.K.," says Sid Pai, partner and managing director for TPI India. "They are likely to place many more of their delivery employees in these geographies.

Undersea fiber optic cables connecting both East and West Africa with the rest of the world via broadband may help emerging markets like Ghana and Kenya make bids for IT and business process outsourcing (BPO) business, but offshore outsourcing maturity will take more time and effort.

"African countries will present better opportunities for outsourcing as their respective infrastructures improve, but they still have a ways to go in the capabilities of local labour pools, infrastructure and needed access to capital," says David Rutchik, partner with outsourcing consultancy Pace Harmon. "South Africa presents the best option based on resources, language and modernity of infrastructure, but continued energy challenges and safety concerns will keep it from emerging as a credible alternative to established geographies."

Large multinational outsourcers may look south for acquisitions in 2010. "The large ITO and BPO service providers from the U.S., Europe and India will be on the lookout for opportunities to acquire regional Latin America-based service providers and in-house shared services organizations of Latin American companies," predicts TPI Momentum's Williams.

Expect service providers to expand organically or via acquisitions in Mexico, Argentina and Brazil specifically, largely to serve local markets, says Bob Cecil, head of EquaTerra's business and financial process practice. "Perhaps the best sign is that most Indian players are actively starting or growing their presence in Latin America," says Alsbridge's Trowbridge.