Recession to hit outsourcing?
With economic observers now widely predicting that the current credit crunch being experienced in the US will develop into a full-blown recession, concerns have been raised over the impact this may have on the IT outsourcing industry.
At a recent industry conference held in Mumbai, Simon Ormiston, the head of outsourcing marketing at BT Global Services, warned that, as businesses look to cut costs as the economy slows down, many are likely to spend less on their IT operations and therefore projects could be postponed until things pick up again or cancelled altogether.
Such a reluctance to turn to third-party providers for IT solutions is most likely to be felt the hardest in India, currently the world's number one location for outsourcing.
Given the vulnerability of Indian IT services providers to a US economic slowdown - the country is the Indian industry's largest market with a 61 per cent share in comparison to the UK and the rest of continental Europe which account for 18 per cent and 12 per cent respectively - a number of companies have already taken steps to guard against a recession.
At the end of last month, India's largest software company and its largest private sector technology employer, Tata Consultancy Services, announced that it is to cut back on its employees' performance-related pay rates for 2008 after years of steady wage rises, while IBM has also confirmed that it is to lay off some 700 professional positions over the coming months in an effort to reduce its risk exposure.
One other reason for the redundancies and cost-cutting is the rising value of the Indian Rupee, which means that firms are no longer able to offer high salaries in an effort to attract the best professionals, while the weakening of the dollar and, to a lesser extent the pound, is also causing some companies to rethink their outsourcing policies.
Despite this, Mr Ormston has remained optimistic about the industry's outlook, arguing that, despite the general economic slowdown, outsourcing information technology will still offer financial advantages to European and US businesses looking to cut back on their operating costs.
He told the conference: "Large companies could find a competitive advantage and cut productivity costs by outsourcing to India, which still has a massive price advantage."
According to S Gopalakrishnan, managing director of Indian-based Infosys, the sector remains "cautiously optimistic" about the future, as they look to the long-term rather than react to the immediate economic downturn.
In addition, a recent report into the global outsourcing industry carried out by Morgan Stanley concluded that businesses tend to cut money over the first year of a recession through making in-house redundancies, while it is in the second year when they look to cut back on outsourced costs, meaning it may be some time before the full impact of the economic downturn upon outsourcing is fully appreciated.
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