Thursday, February 28, 2008

Global recession slows outsourcing

Source :

India and other lowcost labour markets could see growth in outsourcing services slowing down in 2008 due to the looming global recession, a global strategic advisory firm has said. The multinational Hackett Group found that there was still significant longterm opportunity for continued business growth in India, as companies in North America, Europe and industrialised Asian markets struggle to reduce costs and drive higher effectiveness.

This they do by primarily outsourcing various areas of business to Indian and other lowcost labour markets.

But in response to the threat of an economic downturn, many companies are hitting the pause switch on their globalisation efforts, said Hacketts globalisation and outsourcing practice leader Julio Ramirez.

Interest in offshoring is still high, and the best companies are moving forward with projects that combine globalisation with strategic process transformation, he told a news conference.

During recessions, the best companies focus their efforts on rapidly driving higher efficiency in back office processes, freeing up excess working capital, and enhancing their enterprise performance management systems and processes, Ramirez said.

These companies will use the economic slowdown to accelerate their outsourcing initiatives, increase the scope of existing contracts, or in the case of insourcing, push more work to their offshore captives.

However, the study of prior recessions show that as the threat of a recession deepens, many companies will switch their attention to operational and financing challenges, often resorting to simplistic solutions that are not sustainable and may in fact weaken competitive positioning, he said.

Most offshoring projects require an upfront investment for contracting, setup and transition that can result in a neutral to possibly negative impact on shortterm expenses and many companies will choose other tactical moves that provide paybacks over the next 12 to 18 months, he added.

In addition, escalating wages and currency appreciation in India have also generated questions on sustainability of cost savings, adding to the debate on the speed and timing of such strategic moves.

Hackett said that a possible recession would drive greater interest in globalisation by the Global 2000 companies.

However, factors like inflation, wage rate changes and currency movements, upfront project of transaction costs, productivity improvements and attrition might work against greater flow of offshoring to India in the shortterm, Ramirez said.