With increasing marketshare, the Indian-headquartered offshore players are, without doubt, making a significant and irreversible impact on the entire IT services landscape. A look at the revenue ranking of the top 15 or 20 IT service providers show that the list is still dominated by the largest and most established global companies that occupy those positions today.

On the other hand, seen from a customer mindshare perspective, the offshore players are getting stronger and stronger. In this interesting phase of evolution and maturity of the offshore industry, a look at what might happen in the coming year a very interesting effort.

The offshore players are constantly improving their delivery effectiveness are mostly organized as:

1. Customer facing front ends aligned as vertical domains, geographical segments in emerging economies and structured as culture sensitive account management teams.
2. Increased investments and focus on improving the processes, tools and methodologies and make these more integrated and wherever possible customized to specific opportunities.
3. Massive increase in scale of operations as can be seen by ever increasing number of service offering and more focused account mining approach.
4. Truly global delivery capabilities are getting built – new locations and better scale outside traditional offshore locations serve as the true engines for growth.

Offshoring revenue models are slowly getting realigned to linking revenues to business value adds. With IT budget growth and productivity gains slowing, the IT industry is bracing for a new phase of evaluating investments in technology and the offshore model is providing with newer range of attractive options.

Considering the stage of the industry, I shall try to summarize the various things that I see happening in 2007 in global offshoring. (This is not an exhaustive list covering all tech trends - something I'll save for a different occasion...)

1. There is a wave of capital chasing new ideas centering in offshoring and several small and medium enterprises, are actively pursued by various class of investors. We shall see the hitherto conservative players investing significantly in various things and mature into significant players in grabbing offshore deals.

2. Single vendor sourcing (for offshoring) may become quite limited and multi-vendor sourcing may become the norm. The mix may see a shift – Tier 1 offshore vendors and LOB/Horizontal Tier II vendors may become the combined winners in this mix.

3. Customer satisfaction indices are beginning to show downward trend as per few reports. A better understanding by matured offshore model employing customers of the model and the possibilities in tandem with more competition amongst offshore service providers would put more pressure on service providers to show better productivity and quality measures.

4. More and more analysis of offshoring success and failure stories would begin to surface. Organizations stepping up offshoring would do well to focus more on governance, SDLC management, program and customer management processes, quality, training and an eye-on-the ball – ROI. Many sourcing deals that underperformed have been effectively diagnosed to have had weak and ineffective governance processes and structures.

5. The sourcing conundrum may become more complex – the crunch in sourcing and the resultant margin effects shall be felt more in the coming year. Tier 1 players are scaling up more aggressively and this includes several top level recruitments from other global majors and from other dominant regional service providers. Offshore players may also begin to aggressively recruit top league domain experts in large numbers.

6. The so called cost increase in India would by and large be contained with marginal tick of realized prices upwards - the mitigation would be coming in by productivity gains, resource & service mix. The inflation in US market would also serve as a partial buffer towards the cost increase.

7. While opportunities in demand-side may abound, supply could become a bigger bottleneck, to an extent. Whichever organization manages the supply/retention side better would prosper better.

8. The captive model for offshoring may see a significant change – the business model of the captives from being a cost center in some cases may change to be treated as full fledged business units including some spin-off possibilities. Many underperforming captives are constantly signaling for help – a precursor to them losing their identity in due course.

9. Flush with cash/ access to cash, and spurred by constant pressure to grow faster, all firms irrespective of their tier status would announce overseas acquisitions in 2007. Global players shall increase their offshore sale aided by big ticket acquisitions.

10. Private Equity firms will keep looking for acquisition and rationalization opportunities of the large outsourced service provider ecosystem. They may be bringing about far more change in the offshore service provider space – much faster than the global players eyeing opportunities therein.

11. Amongst the hot areas for growth include infrastructure management, offshore product development, healthcare, retail & logistics. FA0 & HRO would scale up significantly. The clichéd term -KPO may drive increasing levels of business for the offshore players.

12. India shall continue to be the undisputed leader in offshoring for ITO/BPO. Other Asian/eastern European countries significantly lag behind in this game. Philippines shows promise to be No.2 behind India in BPO.

13. The development of new offshore locations may be more complex than it meets the eye. The often talked about China option is failing to take off – even for services like BPO/shared services as language, productivity and IP related issues abound. In all the wannabe competitors for offshoring the ecosystem there is very weak: the domestic vendor landscape highly fragmented; many small providers providing support for legacy application showing limited ability to scale up and foster innovation.

14. Service organizations may see more and more restructuring to align along tech practices/geography and verticals. Their acquisition targets may to a large extent keep pushing their ability to service opportunities beyond what these structures are geared to deliver.

15. Large accounts/deal chase teams of offshore firms staffed by executives of global majors may be strengthened further – we may see large infrastructure wins recorded by offshore majors. Mega BPO deals may get announced. Europe shall also begin to offshore more volumes, while US shall remain the single largest market and a hot one at that.

16. Big deals get the publicity but mostly selective sourcing will remain the primary sourcing model and some statistics indicate that the number of organizations considering offshore outsourcing through big deals vs. selective sourcing could be in the ratio of 1:6 and this ratio is not showing signs of improving further.

17. Offshore majors would work on coming out with a viable approach towards offerings centered on disruptive technologies like SaaS. Global majors may work hard to demonstrate better value add to their customers leveraging their offshore presence.

18. New breeds of offshoring players with different business models shall spring up. Innovation in the services space would continue to come out of India.

19. We may further see change in the rankings and growth rates amongst the top 10 offshore players change based on their business models and their organizational strengths. The era of an almost automatic growth is giving way to more deterministic models of growth pursued with deliberation and delivered effectively.

20. The threat to the offshoring services industry would be coming in form the IT infrastructure utilities - though this may be few years away. We may see some pioneering efforts by a few business units in adopting these and may also see offshore providers coming up with hybrid approaches to adopting to IT utilities (as part of their evolution.)

About S. Sadagopan…………………………………………………

S. Sadagopan, heads consulting and eBusiness for Satyam in the Asia Pacific, Middle Eastern and African markets based out of Singapore. He hosts a blog focused on emerging technologies & trends. These are his personal views. Email Sadagopan at sadagopan@gmail.com.