SHORT-TERM SLOWDOWN?

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.

Comments

[Melissa Brewer]

Unfortunately, there has been very little media covereage of a new outsourcing model that has taken root here in the US - homesourcing. While many Indian BPO's are predicting a surge in offshore outsourcing, many US-based BPO's are taking up the slack by employing home-based (telecommuting) workers here in the US. No offense, but when you hear the predictions of offshore outsourcing, many of the principals quoted are Indian business owners - and they have a reason to sing the praise of offshore cost benefits. The US-based telecom industry is changing with the flood of inexpensive, VOIP technology and the use of social media as a training tool. Companies such as LiveOps, Alpine Access, and Working Solutions here in the US, and RuralEx in Canada have proven the less-expensive homesourcing model works well - in terms of cost effectiveness as well as CRM. It would be nice to see more coverage of this emerging telecom industry trend. The cost benefits of homesourcing offset the downside of offshoring. JetBlue and other large corporations have turned to this model. When is the media going to notice it as well?

[Peter Allen]

Melissa ...

Your points are well made. But, I'm not sure that the trend is specific to teh telecom industry. Certainly the advances you cite in telecommunications technologies are enabling the ability to flow work to the worker. Yet, we see interest in 'homesourcing' among many industry segments, largely those that cater to consumers. There's a largely under-tapped workforce in the U.S. that can be leveraged for transactional work ... provided that we can flow the work to the worker. Look for more on this topic tom come!

Peter

[Subir Dhar]

Melissa..

It is really very interesting to note the growth of "Homesourcing" in US, and how it is being facilitated by new telecom technologies.

These very same telecom technologies are making a difference in India too. Today, a long distance call within India costs as low as 2 cents a minute. Soon, the international calls from India are going to cost the same.

There is hope for "Homesourcing" and "P2P" Outsourcing, wherein the work flows from the most developed regions to the people in the most disadvantaged regions using emerging low cost communication technologies.

As of now, the offshoring to India has largely been limited to bigger cities and towns, but we can anticipate the work to move to even small villages, and the individuals will be willing to deliver certain services at rates as low as $1 per hour. (Some non profits have set up operations in villages).

I feel that Homesourcing will make an impact largely in the CRM/Call Center/Secretarial services/smaller projects but possibly lesser in large scale Application Development and Maintenance projects.

Any thoughts?

Regards
Subir Dhar
India

[Dinesh Goel]

Subir,

I agree. With greater penetration of computing awareness and enabling technologies/telecom at a lower cost level, there will be wider spread of sourcing of services - not just in smaller towns in India but to other smaller countries as well. India shouldn't take their current offshoring market share as given - soon India will have to fight for its market share with the greater competition. Hopefully this phenomenon will improve the current demand-supply situation in India as well as help our infrastructure bottlenecks by easing the pressure in larger cities. Interesting times to watch...