Will The Recession in US economy affect outsourcing?
With advert of the outsourcing boom, many IT/ITES companies have been riding the wave of outsourcing, growing by leaps and bounds. Major low-cost outsourcing destinations like India, Ireland, South Africa, Philippines have benefited from outsourcing, especially by companies from the USA. It was like the outsourcing industry around the world was run as a subsidiary of the US/European economy. However, since last 6 months, the US economy has undergone major changes. There has been a severe sub prime crisis hitting the economy, with the US dollar value has depreciated to record levels.
The credit crunch might have a positive or negative effect on the outsourcing industry. Downturn in the US economy plus possible recession means technology and outsourcing as solutions to the need to slash overheads and minimize any negative impact on the bottom line. The truth is that the US economy is at an unpredictable tipping point. If a very serious recession hits, then companies might actually scale back on outsourcing this would be the result of service companies having less customers, therefore needing less service provision and therefore believing that a scaled-down internal team would suffice as opposed to an outsourced department.
In the IT Industry, operations that will inevitably be scaled down in a time of recession could be the outsourced operations just as easily as the internal processes. The nature of outsourcing deals might change too. Before, the mega-deal has been consigned by many to the outsourcing scrap heap, in favor of multi-shoring and choosing separate suppliers for each process.
A recession will focus back on to cost as a more decisive factor in outsourcing (it has been argued that service levels and quality are now more important) and therefore having one outsourcing supplier will minimize management, due diligence and supplier selection costs. Having one supplier should also provide the end user with the outsourcing equivalent of savings achieved by buying in bulk.
There might be reduction in the number of fixed price contracts in favor of cost per unit, as end-users want to link the cost of supply with volumes (or reduction in volumes of course!).
According to Forrester group, companies are now holding back their IT budgets to cut expenses. However, after some time, the companies may outsource more of their processes when cutting costs pressurizes them, in case the present recession settles to become a mild one. The research group also mentioned that the outsourcing market will rise by 4% in 2008 to $162billion compared to a growth of 6% last year. This is a marginal fall in growth rate for outsourcing. There is a general assumption is that outsourcing is likely to benefit from the credit crunch, but at the moment things are highly unpredictable.
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