While the increased use of industrialized services will reduce the volume of traditional and customized services, the impact on offshore providers will be counterbalanced by new revenue from investments in cloud-based services, says Gartner. However, service providers that are slow, unable or unwilling to invest in the shift to the cloud will risk hampering offshore services revenue growth. The analyst firm predicts continued strong growth in public cloud services, with end-user spending on public cloud services expected to grow 18 percent in 2013 to total $131 billion. By 2015, the public cloud services market is predicted to exceed $180 billion. "The initial resistance to public cloud has begun to subside and customers are beginning to realize its efficiencies as the solutions mature," says Ian Marriott, research vice president at Gartner.
While increased investments in cloud-based services will differentiate the leading offshore providers from labor-intensive "pure-play" offshore providers, they will need to maintain a balanced portfolio of managed services and other traditional delivery approaches, in addition to horizontal and vertically-based cloud offerings. This strategy will allow them to compete successfully with leading multinational providers, by meeting the evolving needs of buyers, and drive the joint necessities of revenue growth and profitability.
"Cloud-based services will not replace offshore services, but will complement them," says Marriott. "In addition, cloud services will not 'make or break' all offshore providers. There will always be a need for "pure-play" providers that operate a labor-intensive delivery approach. But, for broad-based offshore providers that operate in multiple geographies, industries and service lines, and who seek to compete for significant 'wallet share' in major accounts, strategic investments in cloud-based services are mandatory."
In parallel, offshore service providers feel the increased pressure to adapt to changing market demands, and those that are unable to evolve from traditional delivery models could be displaced. Gartner has witnessed slower growth rates of the top 10 India-based providers in the past five years (from 21.8 percent growth in 2011 down to 12.7 percent in 2012). Over time, all leading offshore providers will use their investment in industrialized services and automation to break their labor-intensive linear growth path. "Having the right number of the right quality people in the right places, when combined with a nonlinear growth strategy, will deliver improved revenue per employee," adds Marriott.
The proposed changes in the issuing of H-1B visas (U.S. work permits) could also have a significant effect on offshore service providers that depend heavily on these work visas. This could increase the need to both invest in local hires within the providers' major target markets and increase investments in cloud-based service offerings. "The consequence to offshore providers of not responding to such significant market changes will be the deterioration of market share, acquisition by another provider, or its disappearance from the offshore services landscape," he adds.
For sourcing managers it is critical that they refresh sourcing strategies at least annually to ensure optimal responsiveness to changing market opportunities and business demands. They also need to perform a critical assessment of any investments made by their offshore providers in cloud-based services. For some this exercise is mere "window dressing" for a model that remains almost entirely based around low-cost labor.