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June 2009 Quick Hits - News, Trends & Analysis

Outsourcing In The Middle East On An Upward Trend
In past newsletters, we have commented on the heavy foreign direct investment by TCS & Satyam setting up development centers in Egypt. Although historically the region has been dominated by the energy sector, the move into outsourcing has seen a rapid rise since early 2000s, as evidenced by new concepts such as the Dubai Outsource Zone. The IDC (Global Research Firm) has seen spending on IT services increase nearly 7.5 times in the past few years. Offshoring Times notes that, "Services related to hosting infrastructure also made striking advances, rising by 69 per cent in 2005. The firm predicts outsourcing spending, which amounted to around 15 per cent of the total information technology services market, will reach approximately 23 per cent of the spending by 2010".  
Indian IT Supplier to Buy a Big European Vendor?
Gartner recently commented that before 2011, one of the Major Indian IT Suppliers will buy a major European outsourcer. There were rumours that Infosys was eyeing out a potential takeover of Cap Gemini back in 2008. Some of the Indian providers are pure cash engines operating with 30-35% profit margins, and during this recession, assets are at historical lows, making it a great time to buy. Tata Consultancy Services (TCS), Infosys Technologies, Wipro, & Cognizant are still not considered tier 1 players and as commented by Mark Lewis on Computerweekly, "an acquisition was the only way for an Indian company to penetrate the market and become a global tier-one supplier". Karl Finders from Computerweekly then gets a contrarian view from Robert Morgan, director at Hamilton Bailey, who says that "it does not make sense for Indian firms to take on the large workforce and high cost base of a European company". With the strong labour laws of the EU, large redundancy liabilities, inflexible working hours of continental Europe, it is not an operating model that fits into a top tier Indian provider. Instead I think we will see them buy up smaller consultancies with strong industry verticals trying to climb the value chain through that approach.  
Low Cost vs. High Value Locations
Malaysia was overtaken by the Philippines in 2007 in terms of revenue share of the outsourcing market. However, Malaysia has been focusing on offering high-value competencies, rather than low-end voice services. It no longer wants to compete with low wage locations like India, the Philippines, Brazil, Jamaica, Costa Rica, China, Poland, Ghana, Vietnam, Hungary, & Romania. Instead they are courting companies looking for design and industry competencies to help their organizations become more competitive and innovative. As for higher value services, the following destinations are leading the pack: Israel, Russia, Singapore, Malaysia, Argentina, Ireland, Canada and the Czech Republic. There is a clear trend emerging in the offshoring destinations between high volume low cost countries and the more specialist destinations offering high value services like research, product development, consulting services, this gap will further widen as each destination further enhances their value proposition.  

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