Gartner fires warning to offshore suppliers

Gartner warns offshore IT providers without a cloud strategy that they will struggle to compete with large multinational suppliers

Gartner has warned offshore IT service providers that, unless they have a cloud strategy that sits alongside traditional business models, they will struggle to compete with large multinational suppliers.

The latest research from Gartner predicts an 18% increase in sales of public cloud service in 2013 compared to the previous 12 months. It expects sales this year to reach $131bn and grow to $180bn in 2015.

"The initial resistance to public cloud has begun to subside and customers are beginning to realise its efficiencies as the solutions mature," said Ian Marriott, analyst at Gartner.

Offshore IT services firms, particularly in India, have grown quickly on the back of the time and materials model which offers them linear growth with revenue increasing with the number of staff used by the customer. Research over the last decade from ISG has revealed an increase in global market share of 13% for Indian IT services firms, compared with a decline of 7% for their multinational equivalents.

But growth is slowing. According to Gartner India’s top ten IT services, firms saw average growth fall from 21.8% in 2011 to 12.7% in 2012. According to ISG, between 2005 and 2008, western suppliers’ revenues grew at a 7% combined annual growth rate, compared with a rate of 32% for India-heritage providers. 

But the recession, which began in 2008, has been a shot across the bows. In the years since, western firms' annual revenue growth has been 0.4% and the Indian firms experienced half the growth rate at 16%. ISG said this is the result of a maturing market.

Gartner said offshore suppliers need to balance managed services and other traditional delivery approaches with horizontal and vertically based cloud offerings.

"Cloud-based services will not replace offshore services, but will complement them," said Mr 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 labour-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."

He said offshore suppliers that do not react will see reduced market share, could be acquired, or might disappear completely.

Marriott said IT services buyers should regularly assess what their suppliers are doing in terms of cloud investments but warned that many will just be "window dressing for a model that remains almost entirely based around low-cost labour”.

Peter Schumacher, CEO at management consultancy Value Leadership Group, recently told Computer Weekly that Indian suppliers are more mature in their evolution than they are often given credit for. 

“The traditional players in Europe and the US have been more static than the offshore suppliers,” Schumacher said. 

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