Discretionary IT projects are shelved as companies reassess costs, sales struggle to take off, and the economic growth of outsourcing providers.
The economic decline has become so intense that even the number of offshoring activities is decreasing. Executives who once relied on foreign companies to tackle certain IT tasks are now slowing down some of their offshoring projects, concerned that their cost has become too high. To understand this, just talk to Steve Budny, Director of Global Offshoring at Oceaneering, a supplier of equipment and engineering services used in the offshore oil and gas industries. While the Oceaneering Group (OII) itself has not seen a dramatic slowdown in demand, it is nonetheless taking preemptive action aimed at extracting gains, Budny notes. This Houston, Texas-based company buried some of its IT projects and restricted some of its relocations to India. “We haven’t given up doing some of our business there, but in the short term, we’re doing it in a different way,” he adds.
Oceaneering is not the only company to reassess the role of offshoring given the global economic crisis. While companies are still investing in offshore projects to run basic IT systems, they are cutting the cord of discretionary deals, says Avinash Vashistha, managing director of Tholons, an outsourcing advisory firm. The review is undermining sales of a range of companies that provide IT services and are hampering economic growth in traditional offshoring hubs, such as parts of India.
Conventional wisdom holds that companies tend to outsource more as growth shrinks. While this is often the case when a recession is nearing its end, experts say it could be the opposite at earlier stages of it, as businesses scramble to respond to rapidly changing economic circumstances. It is only when executives foresee a rebound that they rush to relocate; the goal is to build resources without hiring. “Our business has had a weak offshoring market for maybe six months,” said Peter Allen, partner and manager of Technology Partners International (TPI), a sourcing advisory firm.
‘IDEAL STORM’ OF TROUBLE IS HITTING INDIA
India has been particularly hard hit by this downturn, as 60% of its outsourcing deals are signed by US companies, many of whom have struggled to weather the crisis . The global economic crisis first intensified in September. Then the terrorist attacks in Bombay last November quickly worried American companies about long-term security in India as an offshoring destination.
Less than two months later, a financial scandal rocked Satyam (SAY), India’s fourth largest outsourcing provider, raising doubts about the company’s future and raising questions about the quality regulatory oversight of Indian-based relocation service providers. “A perfect storm is hitting India right now,” said Allen, manager of TPI.
While the Indian outsourcing market is still growing, its rate of extension has dropped considerably over the past few years. After expanding by 35% in 2007, the rate slowed to increase by only about 15% in 2008, according to Vashistha de Tholons. The group foresees a sharper slowdown in growth, the rate of which could reach only 6% or 7% in 2009.
Some companies choose not to sign new contracts. Others are considering renegotiating existing agreements. In the words of Christine Ferrussi Ross, Director of Research at Forrester Research (FORR): “Even as recently as September, India was a seller’s market.” But that situation has quickly changed, and India is now a buyer’s market where customers are much better equipped to negotiate better rates and better terms of service. Forrester customers hire vendors who provide work and demand a discount or renegotiation of contracts.
Depending on the size of their accounts, some of the 50 most successful American companies with revenues of $10 billion or more issue a warning message: “You must lower your rates by 10% to 15% if you want to work with us,” says Ross.
THE OFFSHORE BOOM IS FALLING DOWN QUICKLY
Even the smallest companies are pushing for discounts – and getting them. Vizu, a San Francisco-based internet audience measurement company that employs 15 people, recently approached a company it had relocated to India after a two-year hiatus. “We started our business two months ago and they gave us a price that was close to last time, but after negotiation, we were given a 25% discount,” said Dan Beltramo, CEO of Vizu. However, according to Ross, companies must be very careful that the contract concluded is fair to each of the two parties; otherwise, they could end up with a diminished quality of work.
This time last year, the offshoring industry was booming. Until six months ago, clients were worried about the inflation rate indicated in offshore relocation contracts. Others even wondered if India’s tier-one suppliers would eventually agree to carry out their projects, Ross recalls. In India, employee wages rose and turnover rose as demand for labor outpaced supply. The combination of this observation with unfavorable exchange rates for American companies has aroused the ambition of many companies to try to relocate to other destinations in the world, in Latin America but also elsewhere.
Two years ago in Bangalore, at Misys (MSY.L), a leading financial and healthcare software company, employee turnover rates were 30% and even higher in the offshore centers that the company operated there. Towards the end of last quarter, this rate had collapsed to zero. “I’ve been working in the software industry in India for 20 years now, and I’ve never seen a zero attrition rate,” says Cory Eaves, CIO and DT at Misys, which employs over 6,000 employees worldwide. Eaves points out that over the past few years India’s inflation rate has been around 15% to 17%, and for 2009 he estimates it will drop to just 7%. “2009 will be a trying year for India,” he predicts. (end of part 1).
