‘Indian Vendors To Get A Bigger Share Of Global IT Pie’

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Mumbai:: The share of the global IT budget outsourced to Indian vendors is expected to grow from 3.8 per cent in 2002 to 7.3 per cent in 2005, according to Merrill Lynch’s latest CIO (chief information officers) survey on offshoring. The survey adds that the overall IT budget for 2003 is expected to remain flat.

This report is the company’s second India offshore-focused CIO survey. Conducted in May, the sample consists of 50 fortune 1000 CIOs. The first was conducted in October 2001. The report adds that the growth in the proportion of the IT budget to be outsourced to India two years down the line could imply a revenue growth of over 35 per cent CAGR (compounded annual growth rate) over these two years assuming flat IT budgets. Furthermore, assuming at least 5 per cent fall in global pricing per annum, the implied volume growth is over 45 per cent CAGR.

The revenue and volume growth in the calendar year 2003 are also likely to slow down. According to the report, the share to be outsourced to India is expected to be almost flat at 4.2 per cent of the IT budget in 2003 as compared to 3.8 per cent in 2002. It adds, that with a 5 per cent decline year-on-year in global pricing, the implied growth could be less than 20 per cent.

The report states that Merrill Lynch expects a further 5-10 per cent decline in pricing for traditional application maintenance and development work. The pricing range for traditional work is between $17-21 for offshore as compared to $19-23 about eight months back. According to the report, while in 2002 pricing declined by 0-9 per cent for 33 per cent of users offshoring to India, the percentage of users expecting such declines has jumped up to 60 per cent for 2003.

While marginal rates may hold steady in the near term, because of increased customer activity and reduced need for Indian vendors to cut rates because of higher utilisation, the pricing pressure in the long term is expected to continue. Despite this, customers seem willing to pay a premium to a large and well-established vendor, the report pointed out. Of the respondents, 72 per cent had stated that they preferred to continue with well-established vendors. Of these, 51 per cent stated that they were willing to pay 0-5 per cent premium and another 41 per cent said they were willing to pay 5-10 per cent premium. One of the implications, the report pointed out, is that pricing pressure could be relatively greater for more expensive vendors, so as to reduce premiums paid by customers in the past.