Economic Slowdown in the US to Accelerate Offshoring of IT Services
May 1, 2008 – 6:02 pmThe current U.S. economic slowdown will lead buyers of IT services to consider increasing the percentage of their labor in offshore, lower-cost locations such India and China, according to Gartner.
With concerns that the US economic slowdown could extend to other geographies, organizations are refocusing on IT cost reduction and taking steps to accelerate the use of offshore labour. Buyers of IT services will shift from cost containment goals to a greater focus on cost reduction and productivity increases in their sourcing decisions. This will lead to a steady increase in the adoption and expansion of offshore services - primarily from India, but increasingly from other countries as well.
Gartner sees two possible scenarios that will have an impact on offshore services adoption in the coming months: temporary economic downturn (best case scenario) or a more sustained recession (worst case scenario).
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. 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 (GDM) approach in the future. 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. Buyers will be more aggressive with external service providers (ESPs) to have greater clarity on costs, and they will seek immediate savings.
If a more sustained economic slowdown leads to a prolonged recession in the US and possibly other global economies, buyers will aggressively move toward offshore destinations and service providers that can offer a global delivery model to access lower-cost IT labor 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 canceled.
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.
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. 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.
