Will US economic woes impact the market for offshore talent?

by 01 May 2008

The current US unemployment rate is 5 per cent, which is a decade high. Subprime housing, credit, oil and dollar crises are all signs of a potentially severe economic recession in the US.

The US economy may suffer further as the effects of the slumping housing market ripple through the economy, eroding job creation and consumer spending.

Will global sourcing slow down or will it increase as a result? Looking at the past, global sourcing has been a strong hedge in challenging economic periods, due to cost reduction benefits and improved efficiency.

During previous recessions, many companies focused their efforts on driving higher efficiency in back-office processes, freeing up excess working capital, and enhancing their enterprise performance management systems and processes.

These companies accelerated their outsourcing initiatives during economic downturns by increasing the scope of existing contracts, or in the case of in-sourcing, by pushing more work to their offshore captives.

Thus, in the event of a recession, global outsourcing demand could grow at an even faster rate, as corporations attempt to “do more with less”financially.

The success of major Indian-origin service providers – including Infosys, Satyam and Wipro – even during the dotcom boom is a mega-trend of the past decade. Most of the main Indian vendors reported strong earnings and growth for 2007.

The development of best-of-breed service offerings, combined with current market trends could leave the Indian vendors in an even stronger position than they already have been in the last few years. On the other hand, all corporate departments, including IT, are likely to see some belt-tightening during a recession.

Given rising costs in India, cost squeezes could provide an opportunity for other, less expensive offshore jurisdictions to gain ground. It is questionable whether other jurisdictions, particularly China, are ready to ride this wave, however.

China has clear cost advantages (in particular for applications development and maintenance (ADM) work), but costs there are rising too, especially in the major centres on the east coast of China.

One of the key issues affecting the progress and development of outsourcing in 2007 has been the decline of the US dollar, particularly against the Indian rupee (a drop in value of roughly 11 per cent).

For service providers carrying significant currency risk, and especially for those providers with a large portion of their revenue derived from deals with US entities, the declining dollar cuts directly into their bottom line.

If the dollar continues its decline in 2008, service providers may push more aggressively for new means to hedge their respective currency risks and cut costs overall, both contractually and behaviourally.

A continuing decline in the dollar may turn profitable deals into loss-making deals, this would be troublesome for both parties. While customers are always reluctant to agree to a price increase, some of the more mature users of offshore services may realise that it is in their best interests to ensure that their provider is not in a loss-making situation.

However, price increases will come at a cost, and providers will be pushed even harder to innovate and provide more added value.

Another wildcard – especially in recessionary times – is American politics. Outsourcing was a key issue during the 2004 US presidential election and may be again in 2008. So far, outsourcing does not appear to have become a key campaign issue.

However, according to a recent Harris poll, more than one-third of Americans are “extremely concerned” that outsourcing will affect them personally.

Further US economic woes, including a loss of jobs in the US, could bring the outsourcing issue into sharper focus in the 2008 presidential campaign.

On the balance, neither an economic downturn nor a full-on recession is likely to impact the momentum of the global outsourcing phenomena. Some organisations will surely pause or curtail their globalisation efforts.

But this isn’t likely to last and will probably be more than offset by organisations that choose to accelerate their pursuit of cost efficiencies during the downturn.

By Allan Schweyer, president of the Human Capital Institute