The global market for offshored IT services and business processes has nearly tripled since 2001. However, a study finds that service providers have so far captured only 10 percent of a $300 billion opportunity. Over the next five years, the market will grow by an additional $80 billion.

Our study, which includes a comprehensive analysis of the addressable market for offshoring, also highlights ways in which this market may yet evolve.¹ It found that the drivers of future growth are likely to shift somewhat in IT-outsourcing services but will remain largely the same in business processes. Despite a significant slowdown in IT spending, the global offshoring market for IT services has grown by 21 percent a year since 2001. To date, this growth has come largely from applications development and maintenance and from R&D services—segments where we estimate that offshoring has reached about 30 percent of its potential. In R&D, new growth opportunities are opening up in increasingly advanced services. The John F. Welch Technology Centre, in Bangalore, for example, is conducting R&D in technologies such as propulsion systems for aircraft engines and in this way contributing significantly to the design of GE's latest jet engine. Nevertheless, our analysis suggests that, during the next five years, more traditionally outsourced—though not offshored—IT services, such as hardware and software maintenance, network administration, and help desk services, will account for 47 percent of the addressable market for offshored IT services (Exhibit 1).²

The global market for business process offshoring has grown by 49 percent a year since 2001 and appears likely to continue outpacing the market for offshored IT services. Banking and insurance account for nearly half of the addressable business process market, but companies have captured less than 10 percent of it thus far (Exhibit 2). In the next five years, the lion's share of growth is likely to come from these two industries: there are opportunities worth $23 billion to $25 billion, for example, in the offshoring of retail-banking activities associated with deposits and lending, $9 billion to $11 billion in credit card processing, and $3 billion to $4 billion in mortgage processing. Among cross-industry functions, human resources (HR) and finance and accounting appear set to fuel growth.

While the global addressable market for offshoring is a stunning $300 billion, the pace of adoption will be shaped by the interplay of three forces: supply (the capacity and quality of offshore locations), demand (the rate at which companies adopt offshoring), and the actions of industry players. We built a model to study this interplay and to evaluate various scenarios for different industries. Our analysis indicates that approximately 35 percent of the work that could potentially be offshored, worth $110 billion and divided equally between IT services and business processes, actually will be offshored by 2010. We believe that India's offshoring industry, which has captured two-thirds of the current global market for offshored IT services and almost half of the global market for offshored business processes, can maintain its leadership position. But to do so the industry, together with India's central and state governments, must address a few key issues, such as bridging a potential shortfall of nearly half a million qualified workers and improving the country's infrastructure.

The potential expansion of the markets that offshoring can address—say, through new models that go beyond the simple replication of onshore activities—is hard to forecast, since precedents are few and the potential varies greatly among industries. Still, companies can start by looking for ways in which offshoring would allow them to increase their revenues, to avoid or reduce costs, and to improve their utilization of capital.

One leading US bank, for instance, saved $100 million by using offshore staff to detect fraud in low-value transactions that could not be scrutinized profitably onshore. Lower processing costs have even allowed banks to create new products, such as subprime lending to previously unviable customer segments. As for the pharmaceutical industry, it could double the value it creates from offshoring (Exhibit 3), through new or redesigned processes and services that would improve compliance and the quality of its trial data, enhance its analytical capabilities, and help it develop products for consumer microsegments.