The UK market for offshore IT services is poised for further expansion as the model moves to 'must have' status for the country's struggling software and IT services sector players.
In its first ever analysis of the UK's offshore service market, analyst Ovum Holway warns that software and IT services companies will be forced to partner with offshore players or risk losing out to overseas competitors.
But it cautions that some of these "marriages of convenience" may prove difficult to sustain as the offshore players increasingly look to sell direct to major end-users.
Many leading software and IT services companies already partner with providers in India. Capita has worked with Mastek, Logical with HCL and CSC with Satyam.
Pricing and competitive pressures and the flexibility benefits of the offshore model are driving demand among suppliers and user organisations alike, the analyst says. Offshore companies are easily outperforming the flat UK software and IT services market, with revenues in the UK expected to generate £1bn by 2006.
Ovum Holway predicts that the biggest player, TCS, which last year posted revenues of £92m in the UK alone, may soon be the first Indian company to appear in its rankings of the UK's top 40 software and IT services firms.
Phil Codling, analyst at Ovum Holway and author of the report, told vnunet.com that offshore was contributing to pricing pressures across the UK market, with offshore firms undercutting prices sometimes by as much as 40 per cent.
"The pressures facing the UK's software and IT services are not going to go away. We don't expect profitability of the industry to return to the levels of three years ago ... ever," Codling said.
"We're at a critical point. Offshore is becoming mainstream. Major customers are much more open to the possibility, particularly global companies."
Today, much of the work for the offshore sector revolves around software and application services, primarily debugging, maintenance and integration projects, with database integration, consultancy, business continuity and help desk services also featuring.
The analyst is predicting significant growth across business process outsourcing, especially application management and remote managed services.
But the explosion in demand for offshore services is not without a cost. The analyst predicts that up to 25,000 jobs in the UK software and IT services industry will be lost over the next four years as a direct result of work moving offshore.
"Top-tier IT services companies, such as EDS, IBM and Xansa, all have big plans for offshore and will really ramp up their volumes and increase their services going forward," Codling said.
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