Offshore labor penetration in U.S. ADM Market

According to a combined study from Bernstein Research and Everest Research on ADM market, worldwide resources serving U.S. IT market is estimated to be 1.84 million. Out of this, internal resources — in house IT resources servicing the U.S. enterprises — include about 919,000 onsite and 113,000 offshore resources. Further, 810,000 external IT resources like Infosys, Wipro, IBM and EDS) are servicing the U.S. enterprises; of this 526,000 are onsite amd 284,000 are offshore.

Therefore, the offshore penetration into total ADM resource pool is about 22 percent.   

Diverging interest of suppliers and buyers

In the initial stages of ADM growth, the buyers’ and suppliers’ goals were perfectly aligned as suppliers to increase business volume and buyers looked for additional benefits of offshoring. Once a typical buyer achieves optimal offshore ratio (20 – 70 percent depending on the buyers’ situation), the goals diverge. The buyer looks for more value from the relationship whereas the supplier continues looking for more volume.

Buyers are in a Web of complex relationship

Majority of large firms have relationship with multiple suppliers, which increase the relationship overhead and reduces the benefits of outsourcing. For example, ABN AMRO has outsourcing relationships with TCS, Infosys, Patni, IBM and Accenture. British Telecom sources from Infosys, TCS and few other offshore providers. Due to multi-vendor sourcing approach, buyers find themselves in a complex labyrinth of relationships with multiple suppliers.

It was buyers’ belief to leverage best-of- breed service providers (suppliers) that led to multiple vendors wining ADM deals in 2005. Now buyers have started realizing that the multi-vendor sourcing strategy adds overheads and reduces outsourcing benefits. It also becomes complex for the supplier organization to understand the buyer organization (client) business, as they are exposed to limited area of buyer business. This reduces or delays the value-addition from the supplier.

Buyer driven provider consolidation

This realization has prompted a decision to consolidate a large number of opportunistic relationships into a coherent portfolio. Having a common ADM and infrastructure provider often leads to further consolidation across IT towers.

Buyers should reassess their current sourcing approach in ADM and consolidate their large number of existing supplier-buyer relationships to few partnerships. Buyers can limit their relationships to a set of strategic suppliers with demonstrated domain and technical skills and a high degree of commitment.

The effect of this trend will reduce the number of suppliers in the ADM market.

“Buyers are driving the relationship consolidation effort from the desire to optimize their sourcing portfolio and take advantage of labor arbitrage in a more disciplined manner”, says Tisnovsky of Everest. “The new outsourcing and offshoring relationships created as a result of consolidation tend to have more robust structures (e.g., defined service levels, greater risk-sharing, and transfer of responsibility).”

Role of relationship management

Offshore suppliers need to invest in industry-specific skills to position themselves as partners for buyers’ business. Moving from support function relationship to business partnership is going to add value beyond labor arbitrage and going to improve buyers’ bottom lines.

This new growth paradigm in ADM market will help offshore suppliers to position themselves as business partners from their existing supplier-buyer relationships. Value sharing is going to be the wining strategy in move beyond labor arbitrage.

According to Rod Bourgeois, Senior Research Analyst, Bernstein research, “the quality of relationships and suppliers’ account-management capabilities are likely to become defining factors in buyers’ consolidation decisions.” This new growth paradigm will create significant opportunity for suppliers that manage to build on their existing relationships and position themselves as true partners. Suppliers (both traditional and offshore) that significantly upgrade their relationship-management capabilities are more likely to emerge successful from the consolidation.

Indian offshore suppliers ADM revenue

Offshore Indian IT suppliers’ ADM revenues grew at 34 percent in FY ’05 but there is a slowdown in growth in the present fiscal. In FY07, the ADM revenues for Indian IT service providers have registered only 29 percent growth (see Table). Their non-ADM services like remote infrastructure management outsourcing services (RIMO) and BPO are growing faster than ADM services.
 
 
Point of View
 
Traditional offshore suppliers are well positioned to deliver complex ADM services with their strong industry skills and domain knowledge/expertise, which is not readily available in the market. Indian offshore suppliers are building their industry skills and domain knowledge to position themselves for complex ADM market.
 
More and more complex ADM work moving offshore will lead to more and more value-sharing-based contracts in the market. The traditional fixed bid and time- and material-based contracts are expected to depart from the market.