The Hindu Business Line : ‘Offshoring set to slow down’

Hyderabad, Feb. 28 In a contrarian insight on the technology sector outlook, The Hackett Group believes that the looming global recession is likely to slow down the growth for offshoring and outsourcing services.

In the short-term, many companies are seen to be hitting the pause switch on globalisation, leading to delays in deal decisions, and instead focussing on more traditional cost-cutting efforts, Mr Julio Ramirez, Managing Director and Practice Head, Globalisation and Outsourcing, The Hackett Group.

The Hackett Group, a US-based consultancy services provider, said India and other low-cost labour markets are likely to see slowing growth rates for outsourcing services in 2008 as a result of the current recessionary phase.

Explaining the inherent problem in the way recession is defined, Mr Ramirez said that it has to be two consecutive quarters of slowdown. While everybody in the industry and business are experiencing the overall economic slowdown, the Government declares it as recession only after completion of two consecutive quarters.

So what does this mean from the outsourcing perspective? This issue is handled differently by the Fortune 1000 corporations and the rest of the companies. “Clearly, the interaction we have had with outsourcers showed there is clear demarcation between the two—the larger ones are able to extract more out of every dollar spend due to efficiencies”.

Therefore, other companies are resorting to ways such as job cuts, lower travel costs and delay in taking decision on IT spend. In fact, even the larger enterprises are delaying their decision on large outsourcing deals.

Indian SIs may gain

While this means slightly lower growth in outsourcing spend, some of the Indian system integrators could actually benefit from this because of their ability to offer transformation deals.

Hackett finds there is still significant long-term opportunity as companies in North America, Europe and industrialised Asian markets struggle to reduce costs and drive higher efficiencies in finance, IT, human resource, procurement and in other general administrative costs.

Mr Ramirez said interest in offshoring is still high and the best companies are moving forward with projects that combine globalisation with strategic process transformation.

Recessionary phases are nothing new and just like ups and downs in businesses, they come and go. An analysis of earlier recessions shows that when the threat of recession deepens, companies switch their attention to operational and financing challenges.

Why this slowdown is important? In the US most people see house as the important part of financial stability. When they see the value of their most valuable asset coming down, they tend to get conservative in their outlook and cut down on new expenditure such as buying cars, TVs etc as these spill over.

In fact from a macro perspective, for companies, there are hardly additional avenues for fund generation and there is hardly any commercial paper available outside to raise funds. Therefore, most companies take to conservative approach to decisions, he said.

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