Careers: Economic Uncertainty Prompts Companies to Consider Offshoring

Offshore providers could do a booming business as U.S.-based firms try to cut costs by shifting application workloads and IT labor costs overseas

Amid tough times (that may get even tougher), at least one technology sector seems poised for growth -- the outsourcing industry.

Offshore providers, in particular, could do a booming business, as U.S.-based firms try to cut costs by shifting application workloads, IT management workloads, and -- chiefly -- IT labor offshore to lower-cost providers.

New research from Gartner Inc. says economic uncertainty in the U.S. will encourage IT consumers to take a closer look at low-cost offshore locations. Not surprisingly, Gartner indicates, India will be at the top of their lists, along with China and other Asia-Pacific locales.

Surprisingly, services consumers typically embrace outsourcing as a means to contain costs – as opposed to reducing their IT expenditures, according to Gartner.

With such a high level of economic uncertainty, services consumers will increasingly base sourcing decisions on the ability of a provider (or providers) to help them reduce costs and boost productivity levels. Gartner predicts: a distinct uptick in offshoring activity, principally to the Indian subcontinent.

"Factors that will give India the edge over other offshore locations are scale and quality of labor," said Gartner research director T.J. Singh, in a statement. "North American and European buyers of IT services have been the force behind a growing offshore services market and India is central to almost any discussion of offshore services delivery for these buyers."

In spite of the rise of another Asia-Pacific outsourcing superpower -- the People's Republic of China -- India should continue to dominate as a center of offshore outsourcing activity, Singh and Gartner predict.

"Whether it is the indigenous India-centric service providers that have a wide-reaching impact on the IT services sector, or a vast and growing IT labour pool being trained to support a global client base, India will continue to be the most-sophisticated country option to source offshore IT services in the near term," he says.

On the other hand, Gartner concedes, the scale of sub-continental outsourcing could hinge on how seriously the uncertain economic climate resolves itself.

In the case of a temporary economic downturn -- which Gartner labels as a "best case" scenario -- organizations will turn to offshoring to help reduce costs.

"In the best case scenario, buyers will aggressively seek cost-saving measures by accelerating offshore delivery or, for first time users, moving IT services to offshore locations," said Allie Young, a vice president and distinguished analyst with Gartner, in a statement. "For buyers that haven't used offshore before, this will be a critical step to changing their paradigm for services sourcing towards a global delivery model … approach in the future," Young continues.

"First -time buyers of offshore services will seek providers that can prove effective in-transition and project management skills, that can demonstrate added value from previous clients, and that are candid on the real costs of offshoring."

In Gartner's "worst-case" scenario (i.e., a protracted recession) organizations will lean even more heavily on offshoring -- again, chiefly as a means to slash costs. "[B]uyers will aggressively move toward offshore destinations and service providers that can offer a global delivery model to access lower-cost IT labour for routine IT work that must continue for the business to operate. However, noncritical projects may be delayed indefinitely, and for most organizations, any discretionary IT spending will be cancelled", Young said.

"Some variation by vertical market will occur, but most will experience the overall economic recession in some form, and IT will typically be impacted by budget cuts of some form. The mix of offshore work will emphasize routine maintenance and development work vs. higher-value service contracts, and providers will need to work closely with clients to deliver cost savings."

What kinds of costs will companies be looking to reduce or eliminate? Labor costs, chiefly.

"Organizations are likely to conclude that increasing the proportion of work to offshore locations is the best way to reduce labor costs, among other benefits", said Gartner senior research analyst Arup Roy, in a prepared release. "In most sectors, the watchword is ’caution’ -- IT budgets have not yet been cut, and offshore services options are being considered or accelerated as a prudent step to contain labor costs."

Does the declining value of the dollar -- and the subsequent appreciation of the Indian rupee -- offset some of the putative benefits, at least with respect to cost reduction, of outsourcing to India? Not entirely, according to Gartner, which also notes that "the more sophisticated [outsourcing] providers have made critical process investments … [to help minimize] the impact of wage increases alone in their final price of services to buyers."