There's a lot of pressure on CEO's to keep costs down in a struggling economy. One way they can do that is by outsourcing their IT services to overseas firms, especially to India.
Now, this isn't exactly breaking news, but the rate that company's are turning to lower cost outsourcing programs is rising fast. That keeps money out of the pockets of US technology services companies, and devalues their stock prices, to boot.
The proof, as they say, is in the pudding. A new report from the Gartner Group says that the current U.S. economic slowdown will lead buyers of IT services to consider increasing the percentage of their labor in offshore, lower-cost locations. In its research, Gartner says that India will remain the dominant location for IT offshore services for North American and European buyers as a result of its scale, quality of resources and strong presence of local and traditional service providers.
The Gartner report also concludes that U.S. companies will shift from cost containment goals to a greater focus on cost reduction and productivity increases in their sourcing decisions. This will lead to a steady increase in the adoption and expansion of offshore services - primarily from India, but increasingly from other countries as well.
“Factors that will give India the edge over other offshore locations are scale and quality of labor. North American and European buyers of IT services have been the force behind a growing offshore services market and India is central to almost any discussion of offshore services delivery for these buyers”, says T J Singh, a research director at Gartner. “Whether it is the indigenous India-centric service providers that have a wide-reaching impact on the IT services sector, or a vast and growing IT labour pool being trained to support a global client base, India will continue to be the most-sophisticated country option to source offshore IT services in the near term.”
In a "worst case" scenario, if a more sustained economic slowdown leads to a prolonged recession in the US and possibly other global economies, Gartner expects a more-aggressive movement to cut IT budgets.
“Buyers will aggressively move toward offshore destinations and service providers that can offer a global delivery model to access lower-cost IT labor for routine IT work that must continue for the business to operate. However, noncritical projects may be delayed indefinitely, and for most organizations, any discretionary IT spending will be cancelled”, says the Gartner report. “Some variation by vertical market will occur, but most will experience the overall economic recession in some form, and IT will typically be impacted by budget cuts of some form. The mix of offshore work will emphasize routine maintenance and development work vs. higher-value service contracts, and providers will need to work closely with clients to deliver cost savings.”
That doesn't mean that companies are slashing their tech budgets - but they're not growing, either. “Organizations are likely to conclude that increasing the proportion of work to offshore locations is the best way to reduce labor costs, among other benefits”, said Arup Roy, a senior research analyst at Gartner. “In most sectors, the watchword is “caution” - IT budgets have not yet been cut, and offshore services options are being considered or accelerated as a prudent step to contain labor costs.”
One potential obstacle for offshore outsourcing is that the India labor market isn't as cheap as it used to be. That makes predicting outsourcing trends less predictable.
Still, investors should take notice. In tough economic times, every dime counts.
