Demand for offshore outsourcing services will continue to grow substantially for several years, according to recent reports from three major analyst firms.
Meta Group predicted that offshore outsourcing will grow more by than 20% every year, pushing it from a $7bn (£4.4bn) market today to about $10bn (£6.3bn) by 2005.
Almost all application outsourcing services will include an offshore component, and the market will reach $15bn by 2007.
A Gartner report claimed the focus on lowering IT costs is accelerating the use of offshore services. Although companies are tapping offshore vendors primarily for application management purposes, demand is also emerging for business process outsourcing and infrastructure management services.
"There is a growing sense that IT infrastructure management is something that can be packed up in a box and shipped off to someone who can do it more efficiently and at a lower cost," said Gartner analyst Bruce Caldwell.
People are looking to offshore as a low-cost and immediately available alternative to buying and deploying such technologies themselves, he added.
Meridian IQ, a subsidiary of Yellow, a company that provides transportation management services, expected its use of offshore services to increase, said chief information officer Dan Bentzinger.
Driving that trend are the same three factors that led Meridian to first outsource services to Infosys Technologies in India in 1998: speed to market, quality and cost of services.
Infosys has given Meridian the ability to acquire reliable IT resources quickly to deploy services, while also giving it the flexibility to ramp down when they are not needed.
"Meridian is in an upswing right now, which means we are going to be growing our relationship," Bentzinger said.
Even though IT budgets are shrinking or remaining flat in the face of the recession, the amount of money being allocated to offshore outsourcing is increasing as a percentage of overall IT spending, said Infosys regional manager Prasad Thrikutam.
One offshore services company, Cognizant Technology Solutions, reported record growth in 2002, as annual revenues rose to $229m (£143m) from $178m (£111m) in 2001.
Increasingly, offshore companies are being viewed not just as a "tactical cost-saving option but as more of a strategic proposal", said Ram Mynampati, chief operating officer at Satyam Computer Services. This is reflected in the higher-end jobs Satyam is being asked to do for its US clients.
However, a report by Forrester Research claimed project management remained a major challenge for many companies that outsource to offshore vendors.
One-third of the respondents in the survey of 145 "decision-makers" at North American companies said they used offshore services and planned to spend more money on them in the future.
But "18% of respondents using offshore providers reported a major challenge in measuring performance, while 20% have serious issues specifying the work needed to be done," the Forrester report concluded.