Offshore outsourcers can offset the damage the cloud is inflicting on revenues — but only if they devise a cloud strategy of their own.
The key to survival for offshore services firms in the long term depends on having a balance between traditional outsourcing and cloud-based products, according to Gartner.
"Providers that are slow, unable or unwilling to invest in the shift to the cloud will risk hampering offshore services revenue growth," the analyst firm said in a statement.
Investment in cloud services will help firms differentiate themselves from labour-intensive, pure-play offshore providers. But they will still need to maintain a balanced portfolio of managed services and other traditional delivery approaches.
Role of cloud services
Ian Marriott, research vice president at Gartner, said it is not a question of cloud products replacing offshore services.
"Cloud services will not make or break all offshore providers. There will always be a need for pure-play providers that operate a labour-intensive delivery approach," Marriott said.
However, broad-based offshore firms that compete internationally in many industries and service lines will have to invest strategically in cloud-based services, he said.
Gartner is advising sourcing managers to examine carefully any cloud-based services that their offshore providers come up with: "For some this exercise is mere window dressing for a model that remains almost entirely based around low-cost labour."
These managers should also review their sourcing strategies at least annually.
Gartner estimates that public cloud services will grow 18 percent in 2013 to reach $131bn and exceed $180bn by 2015.
The top 10 India-based providers have recorded lower growth rates over the past five years, declining from 21.8 percent year-on-year growth in 2011 to 12.7 percent in 2012, the analyst firm's figures suggest.
Evolving delivery models
According to Gartner, offshore service providers are feeling increased pressure to adapt to changing demands: "Those that are unable to evolve from traditional delivery models could be displaced."
Marriott believes that the leading offshore providers will use their investment in industrialised services and automation to move away from a model based purely on relative labour costs.
"Having the right number of the right quality people in the right places, when combined with a non-linear growth strategy, will deliver improved revenue per employee," he said.
Proposed changes to the way the US issues H-1B visas could also push offshore providers that depend on these work permits towards the cloud.
According to Gartner, these changes could increase the need to recruit staff in major target markets and increase investments in cloud services.
"The consequence to offshore providers of not responding to such significant market changes will be the deterioration of market share, acquisition by another provider, or its disappearance from the offshore services landscape," Marriott said.