Customers Win As Offshoring Drives Outsourcing Prices Lower

The latest figures from outsourcing advisory firm Technology Partners International show that the offshoring of IT and business processes is having the desired effect--it's bringing down the cost of these services.The total value of all major IT and BPO contracts signed in the third quarter of 2005 fell to $13.5 billion, from $19 billion a year ago. That's a drop of 29%. So, is outsourcing falling out of favor? Not at all, it's just getting cheaper. While the total deal value has fallen, the number of deals is increasing. The third quarter saw 57 new deals, compared with 49 a year ago, for an increase of 16%. Based on these numbers, the value of the average deal in the third quarter was $236 million, compared with an average contract value of $387 million a year ago.

What's behind the shift is that more businesses are getting comfortable with the idea of moving key processes to India or other low-cost countries. That, in turn, is forcing domestic service providers like IBM and Accenture to lower their prices to stay competitive with Indian vendors. In the end, the customer is the winner. The money saved on routine IT and BPO work can be reinvested into higher-value areas like research and development.

All of this portends an increase in offshoring, as companies become better at managing the process. "Offshore outsourcing will experience accelerated growth in the coming 18 months, particularly among client companies with three or more years experience under their belts," predicts Paul Schmidt, a partner at TPI. In other words, there's no stopping this train.