Today's blog on the effect that a U.S. recession could have on the outsourcing industry is by Siddharth
A Pai, Partner & Managing Director, TPI India.
Despite
the subprime crisis, most commentators, self included, doubted predictions of a U.S. recession a few months ago. This confidence has steadily eroded.
Concern about the global economy is mounting - the International Monetary Fund
(IMF) has slashed its forecast for U.S. growth and warned that no
country will be immune from a "global slowdown." The U.S.
Federal Reserve has announced stimulus packages of over $150bn and is cutting
interest rates.
We are now debating how deep and global its impact will be.
Across industries, companies that outsource are evaluating the recessionary
trends. Will an economic slowdown in the U.S. automatically translate into
more interest in offshore outsourcing? Outsourcing is a strong business
proposition in good times, and it's an even stronger proposition when bad times
last. Offshoring will accelerate over the long-term because it drives
cost savings. However, we may not see the same short-term effects, especially
for India-heritage service providers.
Some of the India-heritage providers have enjoyed superlative performance so
far - driven by a unique set of factors such as a highly under-penetrated
offshore market in their primary service segment (Application Development and
Maintenance) and a favorable tax regime in India. None of these
favorable circumstances are reflective of a normal business scenario. Moreover,
these factors are changing - tax breaks in India are on their way out. And India-heritage
service providers have won significant market share in their primary service
segment. In fact, our last TPI Index (Q4 2007) indicated that the total
contract value won by the India-heritage providers increased by about 42
percent Y/Y.
Recession or not, the outsourcing industry has changed tremendously -
especially in regards to the India-heritage providers. The era of labor
arbitrage orientation is ending. 2008-10 will witness a period of updating
historically simple offshore relationships to complex bundled arrangements for
managed services.
Corporations are now concerned with business resilience - with having the
capacity to maintain continual operations. Hence, any dependence on a
particular country, or a particular network, is coming under scrutiny. Corporations
are also concerned with data privacy. The perception that the offshoring of
data increases the risk level may mean that corporations choose not to
offshore.
Competing for large transactions in the marketplace is increasingly driven by
resilience and data privacy, and the only way forward for India-heritage
service providers is to globalize:
Spread geographical presence (lose the India-centric view) for both sales and delivery
- Hire foreign (non Indian) nationals in greater proportions
- Delegate greater authority down the line
- Assume more risks in the contracting process
All of this has been apparent for a while, even before the onset of the recession. Despite this, few of the India-heritage providers have made significant attempts to globalize. Though they will benefit in the long run, they are unlikely to escape the immediate and short-term effects of the global recession on IT spending.
