Recession fears won't halt outsourcing demand

Economic anxieties may impact outsourcing market, particularly discretionary spend, but demand for outsourcing services will continue to grow, say industry insiders.
Written by Jamie Yap, Contributor

Anxieties mounting over the raised U.S. debt ceiling and stalling of economic growth could put a dent on the global outsourcing market, although demand for outsourcing services is unlikely to dry up, noted analysts. Asian outsourcing firms added it is too early to determine what impact the present economic climate will bring, and emphasize consistency and innovation are key to staying competitive.

The outsourcing market worldwide will likely experience a "rocky ride", with growing worries about the debt ceiling crisis in the United States, said Krishna Baidya, industry manager for Asia-Pacific ICT practice at Frost & Sullivan.

Financial markets have tumbled amid other fears the U.S. economy could slide back into recession, as the country's credit rating dropped from AAA to AA+. At the same time, its unemployment rate of 9.1 percent remained unchanged with no jobs created in August.

In his e-mail, Baidya told ZDNet Asia that given market volatility and uncertain growth forecasts, organizations would adopt a "wait-and-watch" approach and also postpone decisions. Firms may also be more prudent and reevaluate new and existing outsourcing relations.

Outsourcing vendors, he noted, will hence probably face shrinking deal size, shorter contract periods, or even requests for "much more value at much less price".

That said, demand for services will likely remain in the upswing, given today's increasing interconnected world, Baidya pointed out.

Furthermore, greater emphasis on cost efficiency in the enterprise will continue to push organizations to outsource their non-core business processes to specialized or niche outsourcers who can offer them sustainable business and financial benefits in the long term, he explained.

Jens Butler, Ovum principal analyst, also said he does not expect a substantial immediate or short-term impact from the debt crisis on the outsourcing market, although there may be slowdown in project areas tied to discretionary spend.

Some firms could become slightly more risk-averse and the potential for projects with longer ROI (return on investment) periods may get downgraded, he added.

Major projects, such as those with long-term investments or for which funding have yet to be released, may get put on the backburner if the uncertainty and crisis continues, creating further disruption in the financial markets, he noted.

Butler emphasized that how the current U.S. economic situation pans out and its impact on the global outsourcing market is contingent on a number of factors, including timing and market confidence globally, regionally and locally.

For instance, if organizations encounter cashflow issues and difficulties accessing funds, then allocation to outsourcing could increase, rather than decrease, he said. "IT budgets may yet again become constrained, but to the advantage of longer-term services contracts."

Baidya added that when it comes to offshoring, other factors such as sentiments against the practice, unemployment rates and "resentful political discourse" could create a hostile environment, forcing some organizations to postpone offshoring decisions or explore local options.

Vendor consistency best bet
According to the Frost and Sullivan analyst, current uncertainty about the state of the global economy actually presents a good opportunity for outsourcing vendors to offer a full suite of services and establish deeper relationships with client corporations.

Asian outsourcers ZDNet Asia contacted added that while it remains to be seen how the global economic situation will turn out and impact the market, it is critical that they stay focused and consistent in their business offerings to maintain competitiveness.

Liu Chu Tzer, senior vice president and managing director at HiSoft Singapore, said different industries respond differently to economic and financial fluctuations. "It all depends on how the economic situation plays out," he told ZDNet Asia in a phone interview.

In the area of discretionary IT, companies may hold back or have longer decision cycles for outsourcing projects. On the other hand, allocated IT work and budgets that are planned in advance and scheduled to roll out at a particular date would be shielded from swings on the economic front, he explained.

According to Liu, the majority of HiSoft's outsourcing business fall into the latter category, and hence provides "more insulation for the company". These projects include maintenance-related as well as research and development (R&D) services.

He added the economic downturn in 2008 and 2009 did not have a tremendous impact on the company's projections. "In fact, it's during [such] economic conditions that our clients tend to increase their interest in outsourcing for cost containment. And as more opportunities are presented, it is up to us to translate that interest into actual demand."

To stay competitive regardless of developments in the external economic environment, the company banks on high-quality value-added services and its handling of client relationships, Liu said.

"This is more evident and obvious when times are [less certain] and clients want more bang for their buck and go to those who have consistently delivered," he shared.

In addition, HiSoft is also investing in creating more high-value service offerings such as consulting, which helps their clients move away from relying on the consulting "big boys", Liu pointed out.

Kris Gopalakrishnan, executive co-chairman of Infosys, noted that during the last economic recession, Infosys focused on strategic areas, keeping in mind long-term objectives. The company's measures included investing in human capital, pursuing new service offerings and verticals, products and platforms, and strengthening its presence and operations in emerging economies.

"We continue to focus on long-term growth irrespective of the business environment," he said in an e-mail.

Less dependency on West
Frost & Sullivan's Baidya said Asian outsourcing companies have traditionally been reliant on U.S.- and Europe-based clients for growth, but of late these vendors, particularly in India and China, are trying to reinvent themselves to enhance their relevance to their clients' business. At the same time, they are looking to domestic markets to grow their business.

Butler from Ovum agreed that many Asian-based outsourcers are attempting to reduce their dependency on the U.S. market, and distribute income streams into broader and newer markets, especially across Asia-Pacific, Eastern Europe, the Middle East and Africa.

HiSoft's Liu said the Chinese domestic market has a "relatively healthy demand for IT services", and while the United States remains a strong market for IT services, diversification is important to spread the company's portfolio and build resilience against economic fluctuations.

Outsourcing demand from the U.S. may shrink as a result of vendors looking at other economies, such as those in South Asia and Europe, to grow business contacts, just as those companies there are looking to outsource more, he said.

Essentially, it's "not putting all your eggs in one basket, whether on supply and demand side", Liu pointed out.

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