Continued Pressure on Offshore Outsourcing Billiing Rates

The downward pressure on rates for offshore outsourcing seems to be continuing. Currently, tier 1 providers, such as Tata Consultancy Services (TCS) and Infosys, are getting hourly rates of $17-21USD for information technology consulting services. This is a significant decrease from the $20-30 range that was the norm during the past several years.

Clearly, one factor causing this is the low barrier to entry in the marketplace. While numerous criteria can be weighed in an outsourcing decision, including technology competancies and ISO or CMM certification, the sheer volume of providers is high.

As the result of the large number of suppliers, many companies that are outsourcing information technology tasks are choosing the strategy of multisourcing. More than one vendor is engaged for projects. The end result is that the outsourcing company is able to command a better price by leveraging it's relationship with another company to which it is outsourcing.

Another pressure point on billing rates is coming from the large multinational corporations (MNC) like IBM and Accenture. IBM is on a hiring spree in India, currently adding 150-200 new resources per month.

MNC Offshore Outsourcing Strategy

The offshore outsourcing strategy of an MNC is very different from that of a typical offshore company. In the case of IBM or Accenture, offshore development services could easily be provided at a very thin margin, in hopes winning more lucrative contracts in North America for strategic consulting. For the typical offshore company, the billing rate is the prime source of revenue.

In conclusion, the price pressure on offshore vendors is a sign of an efficient marketplace. In the past, vendors were able to command significant margins on hourly developer rates. However, increasing pressure on the labor market, and downward pricing pressure due to competition will result in disappointing returns for sleeping vendors.

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