Effect of US Recession on Outsourcing Industry

By Sriharsha Venkata Yellamraju, Sr Research Analyst, EmPower Research
Source: BPOWatchIndia

Introduction

The issue of offshoring and outsourcing has stirred a hornets nest when Barrack Obama launched an attack on companies that outsource jobs to India and China. What is the stand of the three prime contenders for the US top job on outsourcing? What is the effect of the US recession on the Outsourcing industry?

New York, Tuesday, May 13, 2008 : Hundreds of thousands of small medium enterprises (SMEs) are waking up to benefits of offshore outsourcing industry

What is the effect of the US recession on the Outsourcing industry? Can the vendors expect more business due to the situation in the US or is it the time to take appropriate measures to counter the possible slump in the business growth?

According to Julio Ramirez, globalization and outsourcing practice leader at the Hackett Group, ‘many companies are hitting the pause switch on their globalization efforts’. And with the transformational projects on hold the outsourcing companies will see less of the request for proposals (RFPs) till such time the recession scenario actually unfolds. There might also be a ‘dip in deal size especially in the full service models’ per Soumit B, Senior Analyst at Everest Research Institute, as buyers become frugal in determining scope of contract.

With the given scenario purchasers will look to vendors to offer them help in savings and productivity. Rupee appreciations against the dollar and the general inflationary levels in India aren’t helping much. Rupee in fact gained about 11% against the dollar between January and December 2007, which resulted in higher costs for the clients and lower earnings for the offshore service providers.

Hedging of course is an option available to the sellers to manage currency exchange rate risk but it eventually would put more pressure on the bottom-lines as it adds to the costs. Again, wages in India are escalating and the companies are planning to reduce the salary increments ‘to single digits in the next couple of years’ to control the costs. The difficulty with this option is attrition and it needs to be seen how the outsourcing companies would now manage the already high rates.

US recession, however, has some positive effects too on the industry. Hundreds of thousands of small medium enterprises (SMEs) are waking up to benefits of offshore outsourcing industry. Times of India states that SME deals from the US would be around $8 billion by March 2009 and $11 billion by March 2010 from the current levels of about $7 billion. Also the slowing US economy could push the outsourcing up to new levels to low-cost destinations and per the global research firm Gartner India here has ‘a definite advantage over other countries’.

So to better tap the opportunities venders need to move to low cost destinations – either within the country or even outside of it. Trend is evident with many of the top firms opening their offices in countries like Philippines, Singapore, Malaysia, Sri Lanka and a few east European countries. Companies are also looking for new client outside the US – particularly in the English speaking countries of the UK, Australia, New Zealand and Canada.

Offshoring over the long term looks promising. Business Line reports that ‘vendors are expecting the same recession-related factors to fuel increased demand for outsourcing by the end of the calendar year’.