Offshore outsourcing: This is not the end

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...