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The thinking by the traditional IT services companies is to create a blend: Onsite (where local staff provide direct interaction with the client at their facility); off-site (where the team may be in the same region or country); near-shore (where staff are in the same or a similar time-zone, even though they may not be in the same country); and offshore (where the staff are working on services and projects that can be delivered remotely from anywhere).

The aim of such a distributed structure is to create global pools of resources that suppliers can draw on as needed, says Eamonn Kennedy, offshore outsourcing market analyst at Ovum, with the business's requirement sourced wherever it finds that the cost is lowest and the expertise most highly relevant.

For a company such as LogicaCMG, that might mean placing the bulk of a Hong Kong-based customer's application enhancement in the Czech Republic where programming skills are plentiful, while operating the customer's SAP support requirements out of a facility in Malaysia where helpdesk skills are strong.

For Accenture, it might mean placing a customer's project development with a team at its Spanish 'near-shore' centre but the on-going management of the application in India.

For the customer, that represents a more sophisticated - and in many cases, more palatable - set of options. The choice for the customer becomes not so much whether to move directly to an offshore model or not. The customer will assume that any reasonably sized US or European IT services company will be in a position to deliver much of the cost savings that might be associated with the placing of a contract with a 'pure-play' offshore company (see box, In practice: Britannia Airways).

"Offshore outsourcing is turning into global sourcing. And global sourcing is becoming the mainstream delivery model," observes Ian Marriott, an analyst at IT market consultancy Gartner.

What all this means is that organisations need to ensure that their local suppliers have developed the kind of structure that can manage the delivery of IT services and software through a global structure, which is able to chose the optimal delivery locations based on costs, the available skills and domain expertise.

"The reality of business is now a balance of offshore and onshore. You want a seamless network of centres that will ensure you do not have all your eggs in one basket - that is not something that is easy to put in place," says CGEY's Giraud. "There should be no business strategy today without a global outsourcing strategy."

That strategy, however, appears to count on coverage of the different tiers of the global model. What that has meant for US and European IT service companies is they have been forced into a frantic rush to ramp up their offshore and near-shore activities.

100 jobs a week

Some got started a lot earlier than others. CGEY was perhaps one of the latter ones, but thinks it can make up ground. In 2002, it had only about 400 employees working at offshore facilities out of a total headcount of 52,700. But now, through bases in India and China, it is pushing up its offshore numbers as fast as it can, adding 1,100 staff in 2003 and at least another 1,000 this year.

At the same time, CGEY has identified 'near-shore' locations closer to customer bases in Europe that couple modest costs with lower risk and greater opportunity for close customer communication. Two cases in point are a development centre in Clermont-Ferrand in central France and the Spanish Near-Shore Development Center in Madrid, which boasts GE as a founding client. In terms of cost, Bob Scott, VP for global outsourcing marketing at CEGY, indicates that developing in Clermont-Ferrand, where the cost of business is typically lower, comes in at around 30% cheaper than in centres such as Paris or London.

Other major IT service companies claim to have been in a position to take advantage of these lower cost bases around the globe much earlier.

EDS says its build up is not just a response to current demand. Rather, it has been taking advantage of the economics of global outsourcing for the best part of 15 years - even though that was often more to do with keeping its margins up than keeping the customer's cost down.

"We were the first to deliver services from offshore to the client," claims EDS's corporate spokesman on offshoring, Travis Jacobsen. When the company announced its 'Best-shore' initiative in November 2002 it already had 5,500 people in low-cost countries. Since then, it has been recruiting new workers from low-cost countries at the rate of 100 a week: total offshore staff will reach 14,000 by the end of 2004 and 20,000 by the end of 2005. Assuming that EDS's headcount stays relatively static over the next two years (given its ongoing cost-cutting drive, perhaps an ambitious assumption), the proportion of offshore workers at the company will equate to around 15% of its workforce in 2006, up from about 8% at present.

Interestingly, although EDS has around 1,500 staff currently in India, the country is by no means the sole centre of its offshore activities. In fact, it has an offshore capability in 24 other countries that it identifies as having a low cost base, including South Africa, the Czech Republic, Ireland, Malaysia, Mexico, Brazil, Egypt and New Zealand.

The belief is that, by working from a broad base of countries, the economic and political risk can be spread. Moreover, by creating a pool of resources, the supplier is able to switch from one area to another based on changes in costs or the political climate.

And India may not be the default option for cut-price IT services. EDS claims it has the ability to deliver services at an even lowest cost from three other countries: New Zealand, Brazil and South Africa.

With companies such as EDS building up a formidable presence in the region, and Indian companies pitching to their clients, smaller rivals are faced with little choice but to follow the offshore trend. Anglo-Dutch services company LogicaCMG has 600 staff in India, for example, and wants to take that to 1,200 by the end of the year. It also has 150 people working on outsourcing projects in the Czech Republic and Slovakia, and around 50 in Malaysia. These are notable achievements, say analysts, but the proportion of offshore workers at LogicaCMG remains small, compared to a worldwide headcount of 21,000.

Risk mitigation

Other IT service providers that initially lacked the resources to establish a direct presence of their own have partnered with local vendors.

Eric Hogg, managing director at Newell &Budge, an Edinburgh-based IT services company, says he has been working with two Indian offshore outsourcers, Mastek and RS Software, since 1997. Initially, the involvement had less to do with offshoring and more to do with accessing additional skills during the boom-time that accompanied the Internet and Y2K. But in 2001 the company realised that offshore was both a threat and an opportunity.

"We wanted to pass on the cost advantage of offshore to our customers, but to still convince them of our key role as a local partner who understands their business, has the domain expertise, can manage offshore contracts and act as an interface on cultural issues," says Hogg. "We mitigate the risk and take a lot of the overhead out of the customer going direct."

He maintains that the model being pursued by Indian companies involves taking the vast majority of work offshore, something that is not always to the customer's advantage. "In a typical project, Indian companies will place 80% to 90% of the effort offshore. That is on the high side. Our model is to place 50% to 60% offshore," says Hogg.

But does that ensure that its customers, which come mostly from the financial services sector, get the cost reduction they were looking for? Yes, replies Hogg. He puts the savings from offshoring that his company can offer clients at 20%-25%.

That is not dissimilar to the patterns that Adrian Cole, business development director for global outsourcing at LogicaCMG, is seeing. "Programmers in India may be 60% to 80% cheaper, but when infrastructure and other costs are taken into account, a 30% saving is where the goal posts are," he says.

The key is scope and expertise, he says, and the need for management discipline to make that global model work. "Indian 'pure-play' companies are very good at taking a well-defined bit of the project away with them. But where there is a grey area that involves domain expertise, that is where you hear the horror stories," says Cole.

Onshore delivery

The large Indian companies - in particular - have begun to recognise that they need a more balanced structure if they are to make the leap from offshore suppliers to global sourcing companies themselves.

In order to establish their credibility as global outsourcers and to move themselves up the 'food chain' of project sophistication, the leading Indian companies - Wipro, Infosys, Tata Consultancy Services and Satyam - have been making selective acquisitions in Europe, the US and Australia. In all cases, the aim has been to graft on high-level consulting expertise that will provide them with 'local' expertise and contract management skills. For example, Wipro last year bought NerveWire, a Massachusetts-based IT consulting and system integration firm focused primarily on the securities market, and also purchased the IT consultancy and global energy practice of American Management System of the US. At the same time, its chief rival, Infosys, bought the US-based Trade IQ division of IQ Financial Systems, a Deutsche Bank-owned unit, as well Expert Information Services, a 330-person IT services company based in Australia.

But these moves, although relatively significant, still seem minor when compared to the slice of activity that is going to move from local markets in the West to offshore sites. Gartner estimates that up to 25% of what it terms 'traditional IT jobs' will be situated in emerging markets by 2010. And judging by the predictions of executives of IT services companies that at least 50% of the IT effort in customer projects will be done offshore, that figure (at least for lower levels of IT work) may be higher within the sector.

That underscores the fact that the industry is just starting on the biggest structural change in its 40-year history. Jobs for programmers, applications maintenance staff, database administrators and others will increasingly end up offshore. There will also be growing demand for higher level skills such as project management and process analysis expertise as lower overall price points embark on more projects.

There will be a clear and ongoing impact on IT services company revenues, too, as more and more customers use contract renewals to tap into the lower cost bases afforded by offshore outsourcing and as Indian companies win a larger slice of IT services business in the West.

"The jobs will be different, and will be more focused on service, adding value and innovation," says LogicaCMG's Cole. And that means some companies with the wrong skills mix will not be able to make the adjustment successfully to the new global outsourcing model.

As Francisco D'Souza, chief operating officer of offshore specialist Cognizant says: "IT and software services will never again be delivered as they were in the past."