Recent legislation introduced in California has reignited the debate over IT outsourcing.
Experts say the legislation, which seeks to use the state’s regulatory powers to prohibit utilities from shifting jobs overseas, could hurt offshore IT service providers.
But a slowdown in IT outsourcing may already be underway. The United States is currently the largest market for the outsourcing industry, which is dominated by India-based companies Tata Consultancy Services, Infosys and Wipro. But according to Reuters data, average revenue growth for India’s top outsourcing firms by market value is expected to slow to 13.3% year-on-year in the quarter that ended June 30 — down from 18.6% growth in the same period last year.
The slowdown may be partly due to the changing business environment and the growing role of IT. Ever-increasing reliance on technology for a wide array of business functions could mean CIOs are growing less comfortable with offshore outsourcing. CIOs are often less inclined to outsource enterprise IT projects because doing so often means they risk losing direct control. As a business' number of enterprise applications and projects grows, the issue of control only becomes more significant, and companies may simply prefer to bring IT functions back in-house to mitigate risk.
The growth of cloud and the as-a-Service model may also be playing a role in the slowdown of offshore IT outsourcing. While migrating IT infrastructure to a cloud service is not outsourcing in the traditional sense, experts say it is indeed a form of outsourcing. And at the same time offshore IT outsourcing is slowing, use of both public and private clouds is growing.
David Rutchik, a partner at IT consulting firm Pace Harmon, pointed out that clouds are growing significantly among Fortune 500 companies and could threaten the traditional outsourcing model. Overall, he said, more companies will compare the prices and benefits of cloud services versus traditional outsourcing models as part of their strategy.
Finally, businesses that outsource projects are typically looking to gain efficiencies and cost savings. But as the middle class in emerging economies like India grows, those low labor rates may disappear, providing less incentive to outsource.
Some companies, however, are more interested in outsourcing in order to gain access to specific expertise, and that may be one area where India-based firms still maintain an edge. Although there is significant attention on how to shore up U.S.-based IT talent, there is still a lot of progress yet to be made. According to labor market analysis firm Burning Glass Technologies, employers across the U.S. posted more than 850,000 IT job openings during the first quarter of 2015 — 55% more than in Q1 of 2014.
