Due to the increased interest in outsourcing IT and other support services by manufacturers, service providers who offer offshoring capabilities are experiencing double-digit growth.
According to a new ARC Advisory Group research study, the worldwide market for offshoring services in the manufacturing sector is expected to grow at a compounded annual growth rate (CAGR) of over 22% for the next five years. The market was $5.6 billion in 2005 and is expected to surpass $15.2 billion by 2010.
“The manufacturing industry is investing in technology solutions to derive more business value from IT investments. Beyond the primary objective of cost reduction or labor arbitrage, the focus of the manufacturers is on leveraging the talent pool of service providers with domain and technology expertise for services up the value chain,” according to ARC Analysts Libi Baskaran and Russ Novak, the principal authors of ARC’s “Offshore Services for Manufacturers Worldwide Outlook.”
Global manufacturers, who have realized the success rates and advantages of offshoring some operational and business functions, are now looking to outsource IT and support services.
Some companies are even developing their own captive offshore businesses in low-cost areas, such as China and India, to take advantage of the available talent pool. In the engineering sectors, outsourcing and offshoring is becoming more popular as a method to reduce time-to-market for new product launches, noted the study.
These developing regions are also creating their own local offshore service centers to create a low-cost labor pool that is attractive to global clients,
India was the first region to develop th onsite-offshore model and they now lead the offshore services market. Other low-cost destinations are being created by using a similar business model.
ARC's research indicates that this movement of service providers to India and other regions, such as China, Eastern Europe, and Latin America, are examples of collaborative manufacturing strategies using least-cost global resources to create more effective value chains to drive performance in the Flat World.
In Europe, traditional engineering firms are starting to outsource their IT and engineering services to offshore service providers for both discrete and process verticals. As manufacturing shifts into these developing areas, the trend to outsource IT and non-core functionalities will also grow in these regions. China and other Asian locations will then become both a user and provider of outsourced services.