The number of European firms outsourcing IT and business process functions offshore will increase rapidly over the next two years, and spending on offshore service providers is expected to climb 50 percent year-on-year in 2006 and 2007, according to predictions by analyst firm Gartner.

Speaking at Gartner’s annual European Outsourcing and IT Services Summit in London last week, research vice-president Ian Marriott predicted that India will remain the premier location for offshoring, but argued “nearshore” territories such as Ireland, Spain and Eastern Europe are becoming increasingly attractive to European firms, including those in the UK.

Marriott claimed India is “in danger of becoming a victim of its own success”, with high staff turnover and increasing salaries beginning to erode some of the region’s advantages. He added that the delivery capability of Chinese outsourcing firms remains “immature”.

In contrast, Marriott said the proximity of European locations coupled with increasing investment from global outsourcing specialists, including some Indian companies, is making nearshore sites a better proposition.

However, Partha Iyengar of Gartner suggested that India’s dominance of the offshore outsourcing industry will continue for some time, because there “isn’t a compelling large source of vendors as an alternative to India”.

This view was endorsed by Suketu Patel, head of strategic global sourcing at Indian IT services giant Infosys, who insisted Indian salary inflation would not damage the country’s outsourcing industry. “India has the largest population of young people in the world and 400,000 engineers graduating each year so we don’t see the issues Gartner raises as a long-term challenge.”

Som Sarma, vice-president for Europe for Indian outsourcer Satyam Computer Services, agreed the scale of the Indian IT sector means it will see off the challenge of European locations, though nearshore sites have a growing role in the offerings of Indian IT service providers.

“We have had operations in Hungary for 18 months and nearshore is an asset to us rather than a threat,” Sarma said. “It gives us wider language skills and means we can get staff to customers’ sites quicker.”

Separately, Marriott warned that some firms might not be negotiating appropriate terms. “Going in with the attitude that offshore outsourcing is just like any other [outsourcing] deal is likely to lead to disappointment,” he said. “A standard outsourcing contract has 18 discrete areas, but for offshore outsourcing 15 of those areas are different [in some way].”

For example, firms may fail to state which countries’ holiday schedules take precedence for particular projects, said Marriott. He added that companies should also include terms covering currency fluctuations, and state which country has legal jurisdiction over their deal.