Forum: Offshore outsourcers face protectionist challenge

IT spending cuts change offshoring landscape

A representative of an Indian outsourcer tells Computerworld he recently called on a government department to be told they were more concerned, in the current economic crisis, with keeping jobs in New Zealand rather than outsourcing them.

The chief executive of an ICT services company opines that with the trillions of government dollars being poured into the US financial sector, there will be a subsequent push to keep jobs within America.

Does this spell major concerns for the big Indian outsourcers — and their counterparts elsewhere in the world — or do they have an even bigger opportunity as business strives to contain or cut costs?

In a recent article in The Times of India, a vice president of STMicroelectronics, Vivek Sharma, notes that more than a million people are now employed in IT in India and that over the past few years the cost advantage, though not fully gone, has diminished due to high salary increases year after year.

“Already there are hiring freezes and even size reduction by certain IT companies in India, he writes. “This is a recent phenomenon as, in the past, operations in India were not affected by hiring freezes etcetera. It is, therefore, a clear demonstration of local operations maturing and becoming costlier.

“For Indian software and outsourcing firms that earn roughly half their revenue from the US the collapse of financial institutions can have significant impact on their earnings and growth plans.”

He notes that countries such as Vietnam, the Philippines, China and eastern European states are competing in the outsourcing space and that Indian IT companies will have to gear up to meet such challenges.

“Indian companies can take these times [sic] to aggressively step forward from cost advantage to capability advantage by pushing up higher productivity, innovation and other value-added services.”

In an article entitled “The world economic downturn and IT outsourcing: truth and myths”, IT World reviews the findings of the most recent surveys on the impact of the economic crisis on IT offshore outsourcing.

“The rumour has spread all over the world that the world financial crisis will obviously damage the IT offshore outsourcing industry and will dramatically decrease the amount of offshore transactions. However, the latest surveys demonstrate a totally different situation,” IT World reports.

One survey showed that more than 40% of the interviewed outsourcing providers saw increased demand level in spite of the downturn. However, 38% of the survey participants reported slowing down or deferring their outsourcing efforts due to the unclear economic conditions.

A Forrester Research survey found that while 46% of 268 Global 2000 companies had already cut back their IT budgets, only 21% had cut back their IT services spending. Forrester says that companies that have never considered offshore outsourcing before will now do so in order to avoid investing in new expensive technology and adding head count.

According to Infoworld, the number of offshore deals is up 5% compared to this time last year, while the total contract value of the outsourcing deals is up 19%.

IT World concludes that the offshore outsourcing pattern in 2008 will be repeated in 2009.

“One fact is clear — the nature of outsourcing will change,” IT World says.

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