Offshore Outsourcing on Rise for Small and Midsize Companies in 2009

Large enterprises remain flat on offshore services for 2009, says a new Computer Economics report. Could financial fraud scandals that plagued companies such as Satyam in India have had any effect?

Perhaps more telling than the rise of small and midsize companies' use of outsourcing is that the levels for large companies remain essentially the same, says a new report by Computer Economics. Small and midsize companies' use of offshore outsourcing services grew 10 percent from 2008 to 2009.

"There is a surprisingly sharp increase in the number of smaller companies using offshore service providers, but little or no change among larger companies," said John Longwell, director of research for Computer Economics, in a news release. "As larger customers cut back on IT spending, offshore service providers appear to be moving down market. They are doing a better job of connecting with smaller IT organizations."

In 2008, 14 percent of the 200 companies surveyed went offshore; In 2009, that number has grown to 24 percent. From a news release on findings from the report:

""The bulk of offshore outsourcing to date has been among large organizations, defined as those with more than $1 billion in annual revenue, according to the study. These organizations, however, showed almost no change in the overall percentage of organizations using offshore service providers. Among large organizations that outsource some work, about 46% are using offshore service providers this year compared to 48% the previous year.""

The report is titled "IT Outsourcing Statistics 2009/2010: Outsourcing Trends and Cost Experiences for 11 Key IT Functions" including the largest area--application development.
"While the frequency of offshore outsourcing may be rising, this does not mean the actual size of the market for offshore services is increasing. Along with technology vendors, offshore service providers are experiencing the effects of the slowdown in IT spending. The most widely outsourced function, application development, is being particularly impacted by the slowdown in capital spending by IT organizations, according to the study," says the report's abstract.
One of the areas that is possibly affecting the lack of offshore growth for large organizations could be some of the financial fraud scandals that hit some of the large Indian firms in 2008 and carried over in to 2009, namely the company Satyam. Earlier this year, The New York Times profiled some of these issues in its article "Troubles of Satyam Could Benefit Rivals and 2 U.S. Companies:"

""The $50 billion-a-year offshore outsourcing business was growing at a 29 percent annual rate until the credit crisis hit last fall, Mr. Bourgeois said. But he now forecasts growth in 2009 to be about 10 percent."The impact on other Indian outsourcing companies is unclear, but analysts say that, long term, the fraud could have wide implications. The scandal at Satyam - a company listed on the New York Stock Exchange and audited by an American accounting firm, PricewaterhouseCoopers - raises doubts about other Indian companies."'This is a crisis of trust,' said Frances Karamouzis, an analyst at Gartner. 'It's not really Satyam at stake; it's the India Inc. brand.'""

Still, the growth for small and midsize companies in offshore outsourcing is not to be overshadowed by the scandals. Offshore outsourcing is not only in India, but many other countries including China, and many Eastern European countries. There is also a hybrid market in place that includes U.S.-based companies that have offshore operations. That trend has gained a lot of attention from companies such as IBM who had large layoffs in 2009, with much of the work being sent overseas.