October 12, 2016 4:05 pm | Updated 11 months ago.
Opportunities and Challenges for Offshore Vendors
Before we analyze the challenges that the medium to small size offshore service providers may face going forward in capturing some significant portion of the growth in US Technology spend, let us first analyze the trends in the technology spend in the US Market based on a recent IDC Report.
A. Trends in US Technology spend:
i) By 2017 itself, the technology spend by North American companies will exceed $ 1 Trillion.
ii) Maximum growth in technology spends will come from three major verticals, namely, Discrete Manufacturing, Banking, and Telecommunication.
iii) While 40% of the overall IT spend will come from very large businesses (over 1000 employees), it is the medium (100 – 499 employees) and large (500 – 999) business that will see the fastest growth in IT spending.
With these trends forecast by IDC, which we believe to be fairly accurate, we will analyze the challenges that the small to medium size offshore services providers may face in capturing some meaningful portion of this growth in the technology spend:
B. Challenges for small to medium size offshore services providers:
i. Consolidation: Almost all large offshore services providers (Tier 1 vendors) are focusing on their core competencies relating to domain or technology or geographical presence and are strengthening these competencies thru large acquisitions. This will not only result in some significant consolidation in the offshore outsourcing service provider space but will also ensure that almost all of the 40% technology spends by the large customers in the USA as forecast by IDC will be captured by these large Tier 1 offshore service providers.
ii. Deal Size: The average deal size for the small to medium size offshore services providers will be small and hence they will need to win many deals to reach any meaningful offshore services revenue target. This may unduly increase the sales and marketing budget for these offshore services providers.
iii. Regulatory uncertainties: Current uncertainties in global regulatory scenario e.g. visa fees, minimum wages, taxation etc., may require the offshore service providers to manage regulatory uncertainties while executing their growth strategies and may put these companies at a competitive disadvantage compared to the large offshore service providers who have established processes and procedures to manage such uncertainties.
iv. Investment: The three major verticals (Discrete Manufacturing, Banking, and Telecom) that are forecast to increase their IT spend substantially; will heavily invest in IoT, Big Data Analytics, Cloud Computing, Additive Manufacturing and Cognitive Computing. The offshore service providers will, therefore, need to invest in acquiring a high degree of skills and expertise in these technologies and their application. This will force the small to mid-size players to focus only in one or two of these emerging technologies and thereby make the competitive environment favorable to the large offshore service providers.
C. D2E’ Recommendations:
Given that, in spite of substantial growth in IT spend of the North American customers, the offshore outsourcing space will continue to be highly competitive, especially so for the small to mid-size offshore services providers, the following are D2E’ recommendations for these small to mid-size services companies.
i) Choosing the right customer segment: It is recommended that these Tier 2 and Tier 3 offshore service providers focus on medium to large customer segment in North America that , in any case, is likely to see maximum growth in IT spend. Within this customer segment, they may further focus on the fastest growing companies, as these companies will have a maximum requirement for external skills and talent. D2E has been doing an analysis of fastest growing companies in several regions in the USA and maybe of some help in this area.
ii) Collaboration between vendors: A number of these small to medium size offshore service providers should collaborate to be able to not only increase the overall deal size but also to be able to put together comprehensive solutions to complex business problems, similar to the solutions provided by Tier 1 offshore service providers. Such collaboration can be even more effective if it can be successfully extended to Go-To-Market plan of the collaborating service providers. D2E’ Offshore Outsourcing Aggregator platform, provides a framework for such collaboration between its network of Partners.
iii) Partnership with customers: In certain situations the small to mid-size offshore service providers may explore a partnership with their customers to gain domain expertise that will help them to better penetrate the customer base in these verticals e.g. Health Care and Transportation.
iv) Program Management: One of the perceived weaknesses of Tier 2 and Tier3 Offshore Services Providers compared to Tier 1 vendors, is their inability to successfully program manage onsite-offshore engagements with effective communication at all levels in the customer’ organization. Having a close relationship with a US based company that specializes in Program Management of large and complex engagements and having this company to program manage some of the relatively large engagements will substantially increase the level of customer confidence, thus improving the competitive advantage of the small to mid-size offshore services providers. D2E’ partnership with Affinity Inc ( www.affinityit.com ) is a step in this direction.