2008 year in review: Offshoring

The credit crunch
The extent to which risk affects a decision to outsource services to a given location is difficult to determine, and the picture is no clearer when it comes to the credit crunch.

Gartner pointed out that a number of countries have taken advantage of the low-cost outsourcing opportunities in countries such as Mexico, Poland and Vietnam, while a report from outsourcing firm TPI highlighted a slowdown in outsourcing in the last half of 2008.

These trends suggest that the recession is taking a different toll on the outsourcing market than had been expected. When news of an economic downturn first broke, outsourcing contracts were predicted to increase as firms sought to cut costs through automating IT processes and shipping large IT projects to cheaper destinations.

TPI's third-quarter index for 2008 showed that only 128 contracts were signed in the period, amounting to a total of €11.5bn (£10.8bn) and representing the weakest quarter for total outsourcing contract value in the past six years.

Only one 'mega deal' (defined as worth €800m or more) was signed in the past quarter, compared to more than €7bn in each of the past three quarters.

But even though businesses are obviously stalling when it comes to signing outsourcing contracts, many offshore providers argue that they have been relatively unaffected. Tata Consultancy Services, HCL and Satyam still report that recruitment processes remain unchanged.

Yet India's Nasscom recently lowered its growth rate target for the IT industry from 30 per cent to 21-23 per cent, suggesting that the credit crunch has slowed India's offshore market.

And while US sourcing and advisory firm Equaterra still projects growth in the outsourcing market as businesses look primarily to cut costs, the firm argues that this will be at a slower pace.

Equaterra has advised outsourcing buyers and sellers to take action to protect their businesses from currency fluctuations, which can have a negative impact on local currencies by creating instability in cost structures and profit margins.

"The seesawing value of the dollar will make calculating the true costs of offshoring more complicated, challenging buyers and service providers to plan longer-term pricing, cost and profitability levels," said the Equaterra report.

The report also predicted that outsourcing buyers will shift away from project-based contract labour, in favour of longer-term and more formalised outsourcing relationships.

"By committing to longer-term and larger-scale deals, buyers can get better pricing from service providers, better levels of service and lock-in longer term cost savings strategies," the report said.