Offshore outsourcing: This is not the end

Offshore outsourcing

Offshore outsourcing: This is not the end

Only a few companies plan to relocate to lower cost countries, and high levels of expertise and talent pool are still the driving factors in deciding an offshore destination

Deepa Damodaran

Thursday, December 11, 2008

BANGALORE, INDIA: With the American economy in crisis, India has a lot to worry. A lot of speculations have been doing rounds about Indian offshore outsourcing scenario with the downturn gradually settling into a serious recession.

Arie Y. Lewin, Prof. of Strategy, The Fuqua School of Business, Duke University, says, "A lot of pressure will come upon cost, credit and with the crisis taking a heavy toll companies are shaping up strategies for the next 18-36 months, so as to combat the recession." He was addressing a gathering during the unveiling of a study, "The Short and Long Term Impact of Global Financial Crisis on Offshore Outsourcing".

"On one hand, clients as well as providers are becoming more and more concerned about high wage inflation and employee turn-over offshore, which is adding to their woes. Now with the financial crisis blooming into a recession, an increased pressure has come upon saving labour cost, enhancing efficiency through business process redesign and high growth strategy," he added.

"On a positive note, only a few companies plan to relocate to lower cost countries and high levels of expertise and talent pool are still the driving factors in deciding an offshore destination. However, India is going to have tough times ahead to maintain its supremacy in the outsourcing scenario. With other countries giving an equal race, in terms of expertise and talent, for the top slot, India no longer remains 'the' offshore destination today. At the same time, with the offshore outsourcing reaching C-suite level there is an increasing trend to spin-off captives," Prof Lewin adds.

Major Findings:

Off-shoring reaches the C-level suite
Financial crisis implication
Increased pressure on providers to increase efficiency and reduce rates
Emerging trend to spin off captive
Canceling or postponing discretionary projects
Increasing importance of off-shoring for company's growth
Only a few plan to relocate to lower cost countries.

Shift towards software from product development
"There is a gradual increase and shift towards software development than product development. In 2008, over 50 percent of new offshoring and outsourcing projects involved software development and 30 percent in product development," he noted.

The study finds that the total offshoring of product and software development in India is expanding, but at the same time India's share is decreasing. In 2002, India claimed 68 percent of the total market, whereas during 2002-2004 periods it reduced to 55 percent and during 2005-2007 periods it came down to 50 percent. On the other hand China's share has been increasing during the same period.

Moreover, since 2005, there was a dramatic growth in companies adopting strategies for guiding off-shoring decisions at BU and function level. On the whole, of the total percentage implementing off-shoring strategies before 2005 as against by the end of 2007, 75 percent are large companies.

Financing strategies
Thinning cost front has become the first priority for any company today. An increasing trend of consolidation is taking place in service provider industry. A majority of the companies agreed on the fact that they are ready to delay projects and spreading the implementation of project to a longer period of time. However, many will continue to finance the projects that are going on, however try to renegotiate at the cost levels.

Future trends
During the first quarter of 2008 majority of companies had aggressive plans to expand off-shoring of existing projects across all functions and had minimal plans to relocate back home. Regardless of offshoring strategy, 75 percent of large companies have aggressive plans for new IT, F&A and call centre operations outshore.

However, with the financial crisis settling in, companies still maintain the view of enhancing and expanding their offshoring projects and emphasis is on increasing efficiency by improving coordination and integration of process and pressure provider to increase savings instead of pressuring them to relocate to low cost economies such as Sri Lanka, Egypt or Nicaragua or relocate offshore activities to US or sell off captive operations to provider.

So, the golden era of offshore outsourcing is not yet on the verge of setting. There are yet many mileaus to be ventured, though certainly the road ahead wouldn't be smooth.

Share your thoughts readers...

©CIOL Bureau

Would you like to Comment on this Article?

Name
Email
Comment Here
Code Verification

Read Comments

Joe Shmoe said on 12/20/2008 9:51:45 AM:
I am a young programmer in Canada and hearing about all the offshoring trends is making me resent this continent. I hope the old generation of stupid managers is going to go away soon. They are ruining this continent. They are killing the middle class. They are runing our future. all without realizing it. I am an immigrant myself, and if this country betrays me because of your greed and stupidity, f. you, Im going to go back to where I came from. You have no long-term vision and it will detroy you. Youre success is temporary. Dozens of my friends have moved back. Guess what, they are working for US companies in their home countries, laughing at YOU for being stupid enough to betray your own country and pave the way for us back home AND pay us great money in our own country. Hey, it works for us. To all you cost-saving managers - soon you will manage phone lines, no human beings and guess what, your job will be next, because, unlike us, YOU DONT KNOW HOW TO STICK TOGETHER.

to Joe Shmoe

Louis Perugini said on 12/14/2008 8:56:11 AM:
His name was Joe. He was standing in my office red faced, staring at me speechless, unable to comprehend what had just happened to him. All Joe could do was kind of look at me plaintively. You see, I had just offshored Joes job! A week earlier it was quite different. I had asked him to put in extra hours to finish a high priority project. He mentioned something about a kid being sick and walked off. His look was different then, he was polite but the look in his eyes said "your project is your priority not my priority". Joe started mumbling something about hospital bills but I got up and quickly showed him the door. I would not have minded listening to Joe groveling for another hour but I had new business to do. I had discovered offshoring and I could not wait to see who else I could replace. It would not be long before half my team was offshored. I soon discovered the second delightful facet of offshoring. Offshoring teams have no leverage. I was in total and complete control! They would wipe my behind if I asked them to. In conference calls I used to raise my voice and the phone would go dead silent. Wow, I could almost smell the fear through the phone. Oh Yeah! Oh Yeah! Compe to Papa!! I felt 20 feet tall. I was invincible! I just learned my project is over 2 times its projected budget and the CTO is rethinking offshoring. I am spinning down into depression. I fill like a dog returning home from the vet after being neutered. I a wondering was this reality or just some kind of dream.

to Louis Perugini

mike morrows said on 12/14/2008 8:48:06 AM:
I was told that outsourcing to India and China was a smart thing to do. After firing my American team and sending the jobs overseas I felt kind of smug. I used to get together with my colleagues and we would boast about our accomplishments. Those who did not outsource were old fogies who did not understand the world had changed, we would say. Loyalty to your workers, to your country was a thing of the past. Globalism had changed everything accept it or parish. And we accepted it with enthusiasm. Today I learned that large India outsourcing firms like Tata are hiring the same American workers that I let go. They are finding their talent in the same time zone where I work, in places like Brazil, Mexico and Argentina. The rate to obtain the services of these workers is over $100 an hour. Before I had a team of happy loyal employee earning half that. But the worst part, and this is where it really hurts, is that they are saying that large Indian outsourcing firms are moving ahead because of superior management skills. Superior over who? Could they talking about me here? What did I do wrong? I outsourced and outsourced until there was hardly a job left in the American plant. I betrayed my friends my colleagues my neighbors, I destroyed the community that I lived in. I accepted globalism without thought or hesitation!! I am the cool guy here! They cant just kick me out NOW! I have a family to take care of. My wife has medical bills. My kids will be needing braces next year and I have to pay for their university education so they can compete in this global economy. They just cant just up and fire me can they? It would be cruel and Un-American!

to mike morrows

ken huffington said on 12/14/2008 8:46:35 AM:
I ran into a guy today at the grocery store that used to work for me . Boy was that awkward! The guy was paying with food stamps. He used to be one of my best workers too. I can remember how much he used to enjoy his work. He would come in early everyday and have more done by noon then my entire offshore team get done in a week today. Anyway I thought I would say hi. Understandably he was not happy to see me and went into a rant saying that I should be sued and tried for Treason. His comments didnt really bother me that much. I have offshored dozens of jobs and the suffering of a fellow American does not move me much anymore. However the comment about being sued and being tried for treason kind of stuck in my mind. Could the time come when people start thinking about bringing offshoring managers to justice . Sure I turned down applications from qualified minorities in my town. But I did not do it because they were minorities ,I did it because they were Americans. I fired dozens of American workers for no other reason then I was promised I could hire someone offshore for half the price. I tried to build economies abroad when minorities in the city in which I live were unable to find even meager funding for renovating their inner city economies. My company spent millions building schools in Asia knowing schools down the block could not even afford text books. I would like to obtain forward looking legal advice on the possible actions that could be taken against me. I would greatly appreciate it if someone could recommend a good lawyer. Prior experience getting someone off for treason would be great. A deep knowledge about the damage offshoring has done to our communities and economy would be a nice to have.

to ken huffington