Tier II and Alternate Locations Present Fresh Outsourcing Avenues

One of the major concerns of the sourcing community is that suppliers are unable to deliver the cost and service benefits that had been agreed upon at the start of the contract. As outsourcing contracts become more specific in requirements, clients expect their suppliers to possess intimate knowledge about the industry they operate in — apart from being well-versed in specific technology areas. This is over and above the constant and overarching need to keep costs down. It’s a constant point of pain and one that I’ve seen frequently in my five years as an outsourcing analyst.  

Although outsourcing, especially to India, remains an attractive option for deriving cost savings, I see increasing concerns about the quality of the services. As the Indian economy strengthens, the currency arbitrage that the Indian IT Services vendors used so heavily to their advantage is eroding. Moreover, the rising cost of living across major IT hubs in India is fueling wage inflation and attrition, and squeezing the margins for the suppliers. For example, between 2006 and 2012, Infosys’ operating margins have fallen from about 33% to 29%, TCS’ from around 30% to 27%, and HCL’s from around 24% to 15% (all revenues considered in Indian Rupees) in the same time frame.

In this environment, I am often asked about three things: 1) the technical and delivery capabilities of smaller Tier II Indian vendors, 2) the viability of engaging with them, and 3) the feasibility of outsourcing to alternative offshore locations (other than India). To answer these questions:

  • Tier II suppliers are making significant investments in new technology. I see the Tier II players making smart investments to meet the new technology demands from clients. For instance, TechMahindra recently acquired a mobile device testing platform from Anritsu, which it plans to incorporate in its portfolio of offerings; and MindTree has developed proprietary solutions around Bluetooth technology, which they license globally.
  • Tier IIs are indeed viable options — for the right client need. A Tier II supplier can be leveraged to complement an existing vendor portfolio, to bridge supply gaps during times of rapid business change or growth, and on smaller, niche engagements. With their focus on niche sub-segments within larger verticals and specialized skills in industry specific technologies, the Tier II vendor is emerging as a practical alternative for clients looking for quality offerings within tight budgets for small to mid-sized engagements. For instance, many contracts for these Tier II vendors fall in the sub-$50 million range with a large number in the $5-$20 million range. Hence they are experienced in dealing with the specific requirements and challenges of smaller, focused engagements.
  • New offshore locations are worth evaluating. India is and will remain the outsourcing location of choice for several years, yet I see alternate offshore locations, particularly within the South East Asian and Latin American (Latam) regions that can offer highly competitive pricing, technically qualified resources, and, in the case of Latam, a "near-shore," culturally similar offshore destination for North American clients. Having suppliers in countries can be beneficial for clients focused on using Agile methodologies, or clients needing support in Spanish or Portuguese. Some of the Latam offshore locations and vendors have been evaluated in the recent Forrester report “Offshoring In Latin America: Do Argentina, Brazil, And Mexico Offer Attractive Opportunities?” 

As a new Forrester analyst, I’m excited to be working on questions like these. In my upcoming research, I will address the sourcing professional’s questions about supplier-options other than the top offshore vendors and take an in-depth look at alternative offshore locations.

Interested in knowing more about Tier II Indian vendors? Look out for my upcoming report on the relevance of Tier II providers in the present business environment. In the near future I will be also be taking a deeper look at the value proposition of vendors such as MindTree, Mahindra Satyam/TechMahindra, and L&T Infotech, to name a few.