The common speculation that outsourcing and specifically offshoring of IT services would rise dramatically in the recession remained just that -- speculation! In fact in the last two quarters, barring some exceptions, the offshored based IT services companies also saw their revenues from new deals fade just like other industries were hit with recession. This is surely merits a study to understand why this is happening. It looks obvious that an industry thriving on reducing operating cost would only benefit in a situation where bulk of their customers (in US and Europe) move to an environment of severe crunch.
What could be the reason? While an empericial study led by interviews on both sides (customers and service providers) can share some data backed insights, following are some guesstimates based on my interaction with people in the industry:
- Outsourcing and offfshoring activities generally require time to execute through a well defined procurement process if it has to be done at a large scale ( to derive larger value of benefit). Hence this was not considered as an exercise to reduce operating cost since the horizon of initiating, getting a new provider and finally breaking even would be over 24 months --- a time horizon much farther away than the urgency demanded.
- This increase in revenue would have come most from companies who had shied from offshoring in the past and would gain most by unlocking this latent chained value in their operations. However these same companies also shied from offshoring now, which would have resulted in further unemployment in their country. This was not a desirable PR move given the focus on increased unemployment due to recession.
- Many of the companies did outsource but not to offshore based service providers. They outsourced to local American or European IT services companies who offered labor arbitrage close to what the offshored based players offered by having India based centers to deliver work. So, while the offshore based players may have resulted in a marginal better value, enterprieses took a stance to outsource to in-country companies which helped without any negative PR of jobs going to companies from other other countries. Of course, at the back-end these US/Europe based companies leveraged labor in other countries.
What could be the reason? While an empericial study led by interviews on both sides (customers and service providers) can share some data backed insights, following are some guesstimates based on my interaction with people in the industry:
- Outsourcing and offfshoring activities generally require time to execute through a well defined procurement process if it has to be done at a large scale ( to derive larger value of benefit). Hence this was not considered as an exercise to reduce operating cost since the horizon of initiating, getting a new provider and finally breaking even would be over 24 months --- a time horizon much farther away than the urgency demanded.
- This increase in revenue would have come most from companies who had shied from offshoring in the past and would gain most by unlocking this latent chained value in their operations. However these same companies also shied from offshoring now, which would have resulted in further unemployment in their country. This was not a desirable PR move given the focus on increased unemployment due to recession.
- Many of the companies did outsource but not to offshore based service providers. They outsourced to local American or European IT services companies who offered labor arbitrage close to what the offshored based players offered by having India based centers to deliver work. So, while the offshore based players may have resulted in a marginal better value, enterprieses took a stance to outsource to in-country companies which helped without any negative PR of jobs going to companies from other other countries. Of course, at the back-end these US/Europe based companies leveraged labor in other countries.
