4 IT Outsourcing Trends To Watch

How cloud is competing head-to-head with outsourcing more, and other developments to keep an eye on.

Thanksgiving through Christmas, and the outsourcer priced its services based on that goal. "The service provider got a million dollar bonus by reaching that 100% uptime goal. It was written in the contract," says Herbert. 

While that's a classic win-win, such outcome-based contracts are still a minority of deals because specific business outcomes are hard to predict, which makes both outsourcers and clients wary. Herbert estimates that 20% to 25% of outsourcing deals have some portion that's based on outcomes. However, she adds, some smaller deals are fully outcome-based.

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"There are still inhibitors to outcome-based pricing, but it's the best way to align provider goals and client goals." 

3. Indian providers are stepping up
In IT infrastructure deals, India-based outsourcing providers are competing more vigorously than in previous years and beating out US-based providers more often, says Rutchik.

Indian providers like Wipro, HCL, and Infosys "were traditionally on the outside, used by necessity," says Rutchik, but they can compete now with IBM, CSC, and Hewlett-Packard -- and drive prices down accordingly – by using technologies that allow remote management of data center monitoring, servers, and patching. 

These capabilities add more appeal to the existing appeal of lower wages, younger skilled workers, and a bigger population in India.

4. But don't rule out "domestic sourcing"
There are drawbacks to offshoring – political uncertainty abroad, language and cultural barriers, rising wages, difficulty of securing H-1B and L1 visas, time zone differences -- that have led to more interest in outsourcing to small, lower-cost rural, urban, and semi-urban areas in the US and Canada... what's known as "domestic sourcing."

Simply having your outsourcer in your time zone is appealing, but there are also cultural benefits.

"If Walmart is outsourcing a business process to a service provider in Kansas, they don't have to train them on how Walmart operates," Herbert says. "I've been to labs in India where they have to explain what a Walmart is and why people go there."

On paper, offshoring or nearshoring offer lower hourly rates, but a company may pay more when the costs of visas and travel are factored in. Another offshoring gotcha: lots of junior talent.

"It's typical in India to have big outsourcing teams where most workers have two years experience," says Herbert. "With domestic sourcing, you'll have higher pay rates, but you'll have a smaller, more experienced team doing the job."

The nature of pay-as-you-go makes the cost calculation seem easy. It's not -- but it is more critical than ever. Get the new Cloud ROI issue of InformationWeek Tech Digest today (free registration required).

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