Bangalore: The tide might be turning slowly in favour of US-based information technology (IT) service providers, such as Rural Sourcing Inc., Eagle Creek Software Services and Systems in Motion, with some large US corporations starting to rethink outsourcing strategies.

Two of the biggest customers of India’s $108-billion IT industry, Wal-Mart and JPMorganChase, are shifting a small portion of their back-office projects back in to their global in-house centres or to local IT firms, according to at least two people with knowledge of the matter, who requested anonymity.

For Eagle Creek Software Services, based in Eden Prairie, Minnesota, business from Fortune 3000 companies has been steadily growing in the past two-three years, with large outsourcing clients increasingly starting to shift small portions of their IT services projects to US firms that are located closer and also offer these services at a lower price.

“From our perspective, our clients have accepted outsourcing. Now it’s about finding the right places for the right resources on the right technology," Ken Behrendt, co-founder and chief executive of Eagle Creek, said over the phone. “It’s about age-old issues such as quality, communication skills, distance, but generally and most importantly because of the time to market issues."

To be sure, most Indian firms such as Tata Consultancy Services Ltd and Infosys Ltd have technology centres in some big cities such as Boston and Fremont. But domestic IT firms offer technology services at a much lower price through their centres located in much smaller cities such as Valley City in North Dakota.

“Top (Indian) companies are going to gain top dollar for those resources (in bigger cities). Clients are going to be paying a lot of money advancing those. When we build our technology centres in 2nd tier and 3rd tier cities, there is a huge cost differential between building a centre in tier-1 and tier-2 cities versus a tier-3 or tier-4 city," said Behrendt, who expects his company’s revenue from consulting business clients to grow by 25-30% this year.

According to another US-based IT firm, Systems in Motion, their outsourcing business is expected to more than double by the end of next year. This year, the company generated $35 million in revenue and expects that figure to touch $100 million next year.

“A lot of companies over the last few years have already outsourced a significant chunk of their IT spend," Debashish Sinha, chief marketing officer, said over the phone. “Now they’re starting to re-consider and expand their potential sourcing strategies. Some of these companies that have worked with these large Indian companies are starting to give some of their projects that haven’t worked very well to US-based firms…and also because the cost arbitrage that existed seven-eight years ago is much less today."

Amrita T Joshi, CEO of Ahilia, Inc., a marketing consulting firm focused on global services, outsourcing, and technology industries, weighed in on the subject, “Indian companies who are investing in the US and adapting their engagement model to incorporate domestic sourcing have a competitive advantage in today’s environment. They are better positioned to generate new business and grow existing relationships as global businesses are looking to leverage both domestic and offshore talent."

Other US on-site firms such as Rural Sourcing, and Ameritas Technologies could not be reached for comment.

The shift towards domestic sourcing in the US comes at a time when India’s IT industry faces its toughest period ever, with top clients tightening IT spending. According to industry lobby group Nasscom, revenue from software exports in 2012-13 grew at 10%, its slowest growth rate since the Lehman Brothers collapse of 2008.

“Some of these third-party vendors have not been driving the level of productivity gains that they’re supposed to deliver. Now, big clients like Wal-Mart and JPMorgan are very profitable clients, so they are strategically very important for companies like Infosys and Wipro," said one of the two people cited earlier.

“And if some of these clients started moving back work in-house, that will have a negative impact on all these service vendors. They will have to find ways to offset the loss of business from these clients and that won’t be easy with the market getting more competitively intense," he said.

Both Wal-Mart and JPMorgan declined to respond to emailed questionnaires requesting comment. Spokespersons from all the top Indian IT firms declined comment.

Wal-Mart outsources $600 million worth of business every year to companies like Infosys, Cognizant and UST Global, according to data from outsourcing advisory firm Everest Group. Earlier this year, during the Nasscom Leadership Summit, Wal-Mart had announced strategic tie-ups with IT vendors such as TCS, Wipro, IBM, Accenture and Softech.

JPMorgan outsources about $250-300 million worth of IT and back-office projects a year to IT firms such as Cognizant, TCS and Accenture.

Wal-Mart and JPMorgan are not the first firms to rethink their outsourcing strategies.

Last year, General Motors, which had contracts worth billions of dollars with Indian and multinational service providers, announced that nearly 90% of its IT works would be done by in-house staff in three-five years.

Bank of America had also started to shift a small part of the projects it had awarded to Indian firms to local firms or its own centres, Mint reported on 14 May.

Last week, Bloomberg reported that Bank of America opened a unit in India to review home-valuation reports, as part of a move by chief executive Brian Moynihan’s plan to aggressively cut costs and save $8 billion a year.

To be sure, this is not part of a larger trend and not all big clients of Indian IT firms are taking such measures to cut back on IT spending.

“The change is evolving in a small degree, maybe a one or two or three percent sort of shift that is happening," said Ben Trowbridge, chief executive of outsourcing advisory firm Alsbridge. Trowbridge said this move also had to do with the high rate of unemployment in the US, with corporations starting to think about keeping IT jobs in the country.

But, at a time when the global services delivery model is starting to reach a saturation point and large outsourcing contracts are becoming harder to come by, even a small loss of business is bound to cause nervousness among companies such as Infosys and Wipro, which have consistently lagged sector growth rates over the past two years.

“The (IT services) market has also reached a saturation point. How much more are they going to grow? Once you’ve penetrated those levels, the question becomes what more can you do?" asked Sid Pai, partner, global resourcing and India operations, at Information Services Group, a research and advisory services company.

Multinational software giants such as International Business Machines Corp. and Accenture have also found the going tough lately. In its latest quarter, Accenture posted disappointing results and cut its full-year prediction, citing lower spending from consulting business clients, dragging down shares of rivals and all the top Indian outsourcing firms.

“Some of the GICs (global in-house centres) of companies like Wal-Mart and JPMorgan are now in the position of choosing the quantum of work they do in-house rather than give it out third party," said the first person quoted earlier. “And these GICs have developed quite a track record of delivering consistent productivity gains. GICs are going to take on more responsibilities, and that’ll be a challenge that companies like Infosys and Wipro will have to address."

(This is a corrected version of the earlier story.)

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