IT offshore operations: reducing costs and improving quality

Despite the global economic downturn, the IT offshore operations and outsourcing industry continues to grow, albeit at a slower pace. The main impact of the recession is the intensification of competition among hundreds of IT service providers that undertake the various tasks of multinational companies. Today, a small number of winners stand out from the competition and are about to erode the offshore operating concessions of many Tier 1 and Tier 2 suppliers in India, the Philippines and Russia.

According to McKinsey's 2008-2009 survey of the global IT offshore operations and outsourcing industry (a total of 200 customer-supplier relationships involving companies in Asia, Europe, and North America, including 65 Fortune 200 companies) The rise of suppliers has had a wide-ranging impact. In fact, they are rewriting many traditional management practices; subverting the long-standing offshore service contracting model. They pay more attention to the quality of service, rather than focusing on the benchmarks of offshore employment unit costs as in the past; working with customers in new ways; and controlling outsourcing strategies to a greater extent.

Our findings also show that this emerging group of IT service providers is constantly recruiting talents for the growing demand of global customers, while managing and retaining these talents with advanced technology. Perhaps this is why such companies can achieve high customer satisfaction and employee retention rates in the McKinsey survey, which scores high throughout the customer base and continues to rise year after year. In contrast, customers believe that most other first- and second-tier companies are “flat” and there is no progress. Another major change is that almost all suppliers have a certain cost competitive advantage, so those first- and second-tier companies can no longer win the bid by price difference alone.

At the same time, the featured practices of leading suppliers are becoming more important. According to our survey, the four more important practices are the new service delivery model, stronger business expertise (not just IT technology), more successful talent management, and more specific outcome metrics. We anticipate that these practices will become increasingly important and will be widely promoted as customers force the offshore operations industry to improve performance and provide more advanced services.


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