Rise in in-house centres, fewer outsourcing deals worry IT firms

Two major trends could possibly worry Indian information technology service providers. In the last two years, there has been a steady decline in new outsourcing deals in tandem with an increase in global in-house centres (GICs) being set up by clients.

The number of new outsourcing deals dropped to 1,500 in 2015 from 1,679 in 2013 mainly due to traditional outsourced functions like call centre, IT application development and maintenance, and back office BPO services as well as buying segments all maturing. There is also increased adoption of new technologies like social media, analytics and mobile (SMAC), according to global research firm Everest.

In addition, there is a steady increase in new GICs, which went up to 105 in 2015 from 71 in 2013, as mature adopters prefer an in-house model relative to an outsourcing model to balance sourcing portfolio.

Buyers also prefer in-house model for off-shoring newer functions like engineering services and research and development, Everest said.

For instance, in 2014 biopharmaceuticals giant AstraZeneca announced significant reduction in outsourcing of IT to vendors and moved it in-house.

David Smoley, Chief Information Officer of AstraZeneca, had last month told newspersons that when the company began in-house operations, the IT cost reduced from $1.3 billion (in 2013) to $900 million (in 2016). The plan is to bring down the cost further to $600 million in the next 2-3 years, he said.

The demand pattern is definitely changing. Even if one looks at digital business, the decision is made between business and IT, whereas in traditional IT services, the decision was made by IT and procurement. It is different when the decision making changes and a vendor has to change its go-to-market strategy accordingly. “If you don’t, then you will fall by the way side. These are all major disruptive trends hitting the industry,” said Ganesh Ayyar, CEO, Mphasis.

Krishnakumar Natarajan, co-founder of Mindtree, said the volume of work delivered by traditional services is growing because beyond Fortune 2000 companies, there is a host of mid-size companies that have embraced outsourcing to remain competitive. But the price realisation per unit volume is under pressure and hence growth in currency terms is marginal.

On increase in GICs, he said the outsourcing industry is reaching a stage of customer maturity and hence large customers are starting their own captives. But that is not at the expense of service providers. More sophisticated customers are evolving a model where they co-create along with vendor partners, and this model is fast gaining traction.

There are some core areas that are important to their business that they retain in-house, and work with their partners in a seamless manner, he said.

Boz Hristov, Professional Services Senior Analyst at US-based Technology Business Research, says using captive centres for engineering services and R&D is no surprise, as increased security requirements around the development of “new” IP is compelling buyers to in-source these activities.