Cost Control Next "Killer App" as IT Outsourcing Ramps Up

For vendors, Yankee recommended re-evaluating their business models and delivery strategies in light of this trend. In particular, professional services firms working with the financial services industry seeking large projects or legacy (COBOL mainframe) projects need to aggressively build offshore capabilities. Most industries outside financial services have little willingness and a low adoption rate for offshore outsourcing. Pricing for small projects, Web technology projects, fixed price contracts and process management projects is less subject to pricing pressure, and therefore the need for offshore capabilities is lower.

In addition, professional services firms need to focus on business processes, Yankee believes. By focusing on business outcomes, cost becomes less of an issue for enterprises.

And finally, the consultancy calls on traditional outsourcing firms to move support and maintenance functions offshore and develop business process outsourcing capabilities to mitigate the effects of offshoring. Support and maintenance — the low capital intensity and higher margin components of traditional outsourcing contracts — are moving offshore. As the high-margin components of outsourcing move offshore, outsourcers' margins will erode. Business process outsourcing — particularly vertical processes — will face a lower threat of margin erosion.