Recession causes Outsourcing Gets Crimped

Source: businessweek

By Rachael King

The economic slump has become so pronounced that even outsourcing is getting scaled back. Executives who once relied on outside firms to handle certain IT tasks to cut costs are now reining in some outsourcing plans on concern they're too expensive. Just ask Steve Budny, director of global outsourcing at Oceaneering, a supplier of equipment and engineering services used in the offshore oil and gas industry. While Oceaneering (OII) itself has not seen a massive demand slowdown, it's nonetheless taking preemptive measures to wring savings, Budny says. The Houston-based company has shelved certain IT projects and curtailed some outsourcing in India. "We haven't given up doing things over there, but we're doing things differently in the short term," he says.

Oceaneering isn't alone in reconsidering the role of outsourcing in light of the global economic crisis. While companies are still spending on outsourced projects to run basic IT systems, they're cutting the cord on discretionary arrangements, says Avinash Vashistha, chief executive of outsourcing advisory firm Tholons. The reexamination is eroding sales for a range of companies that provide IT services and hampering growth in traditional outsourcing hubs, such as areas of India.

Conventional wisdom says that companies tend to outsource more as growth contracts. While that's often the case at the end of a recession, experts say the opposite may be true early on, as companies scramble to respond to rapid changes in economic conditions. Only when executives foresee a rebound do they ramp up outsourcing; the aim is to build resources without hiring. "We've been in a soft outsourcing market for arguably six months," says Peter Allen, partner and managing director of sourcing advisory firm Technology Partners International (TPI). He doesn't expect that to change for at least the next three to six months.

"Perfect Storm" of Troubles for India

India has been particularly hard hit during this recession since about 60% of its outsourcing contracts come from U.S. companies, many of which have been struggling. First the global credit crisis escalated in September. Then the November Mumbai terror attacks made U.S. companies briefly worry about India's long-term security as an outsourcing destination.

Less than two months later, a financial scandal rocked Satyam (SAY), India's fourth-largest outsourcing provider, leaving the future of that company uncertain and raising questions about whether there is enough regulatory oversight of India-based outsourcing providers. "There is a perfect storm centered over India," TPI's Allen says.

While the Indian outsourcing market is still growing, the pace of expansion has dropped dramatically in recent years. After expanding by 35% in 2007, it slowed to about 15% growth in 2008, says Tholons' Vashistha. The firm expects growth to taper off further, to 6% or 7%, in 2009.

Some companies are opting against signing new contracts. Others are looking to renegotiate existing arrangements. "Even if you went back as late as September, it was still a seller's market," says Christine Ferrusi Ross, research director at Forrester Research (FORR). But that has changed quickly, and India is now a buyer's market where customers have much more power to negotiate better rates and better service terms. Forrester clients are calling vendors that provide labor and demanding a discount or renegotiating contracts.