How outsourcing will look like in 2009
Generally speaking we can say that analysts have different predictions on what will happen in the industry this year. Some are saying that the down economy fuels IT outsourcing while others believe the crisis slows it.
What is almost certain is that outsourcing will look very differently depending on where you are on the globe in 2009. In fact, many professionals think that the major receiving countries such as India are likely to suffer from the crisis while newcomers may well take advantage of it.
Infosys, India’s No. 2 outsourcer “expects IT services business to be slow in the foreseeable future as clients delay technology spending amid the global economic crisis”. There are three main reasons for that. First, the United States which are suffering a deep recession account for half of the sector’s revenue there. Second, the Mumbai attacks last November put some shadow on the country’s security. Third, the accounting scandal at Satyam impoverished the level of trust in Indian companies which is a crucial issue when it comes to outsource important parts of a business.
On the contrary, Gartner India says the slowdown can be a big opportunity for the country but “companies have to change the mindset from mere order-taking to evolving savvy strategies”. Partha Iyengar, VP, Garter India thinks that it’s the right time for firm that already have a breadth of offerings to make offshoring more relevant since it helps clients optimize costs. But it can be observed that clients are taking longer to decide and the values of contracts being renewed are shrinking.
If we look at smaller players, we discover that markets in Latin America like Brazil and Mexico continue to grow in double digits. As for the Philippines, the BPO sector is expected to grow 20-30% which should result in 100’000-110’000 new jobs this year. “The outsourcing sector remains strong and can potentially help laid-off workers find new jobs” said the Business Process Association of the Philippines. In Malaysia the sector should gain 11-12% this year.
Others, say the outsourcing industry worldwide will be hit by the recession. It seems that some projects that were supposed to save costs have been stopped because they were too expensive challenging the view that outsourcing benefits firms anyway. The mood is now to outsource only basic IT systems while discretionary arrangements are cut. It may well be that executives will rely again on outsourcing only when they’ll foresee a rebound; in that case the aim is to build resources without hiring. According to the outsourcing advisory firm Tholons the Indian outsourcing market will slow to 6-7% in 2009 after a 15% decrease last year. As for Russia, the wages are 10-15% down in the sector as a consequence of a shrinking demand.
A new study by KPMG comes to the conclusion that cities like Brisbane and Belfast are among the alternatives to the traditional offshore locations. Even within India, companies are now looking at other cities than the big hubs, namely Mumbai and Bangalore. The top 50 vendors also opened centres in Latin America, China and in the U.S. last year. This trend may continue in 2009 with Barack Obama wanting to make the technology sector one of the drivers behind domestic employment. But the use of multiple centres will remain the norm this year, with companies still very keen to “replace costly full-timers with contractors working in countries that provide lower wages”.
In fact, even if new trends such as environmental-friendly project management will become crucial, the focus will remain on costs. But nearshoring which is more and more popular is facing raising salaries. For example, in 2004 SAP could hire 5 employees in Prague for the price of one in Germany. Today this ratio is down to 3.5. On the other hand, the skills shortage in western countries may still play an important role with more and more foreign-educated students who come back to their home countries and increase the talent pool in Eastern Europe for example. In addition, the sector will probably see some mergers as a result of the crisis and the “fittest” shall survive.
Finally, it has to be recalled that academic studies didn’t show any long-lasting effects on jobs in sending countries due to offshoring. And the fact that banks were important customers for the outsourcing firms will affect them. But the feeling that financial institutions which have been bailed-out by governments are now sending jobs overseas may well play an important role in 2009. In addition, relaying on contractors who are poorly paid could undermine standards in the West.