Impact of recession in Europe/USA on Outsourcing Industry

by Praveen Joshi on November 12, 2012

The world economy saw the most gruelling time this year since World War II and Europe and USA bore the brunt of it. The first quarter saw a 0.2% dip in UK while USA never fully recovered from the recession in 2009. Consequently, this has had a positive impact on our Indian economy since US and Europe are the largest customers of the Indian outsourcing industry and account for 60 percent and 31 percent, respectively, of IT and BPO exports.

India has been the preferred outsourcing destination for most IT companies in UK and USA, mostly because of its affordable labour, English speaking workforce and stable infrastructure. European countries such as Austria, Denmark and Finland have derived benefits from India’s workforce in fields such as mobile computing, digital media and offshore software development. In fact, latest figures on the Information Services Group’s (ISG) TPI index showed that Europe spent as much as 27 per cent more on IT and BPO outsourcing in 2011 than in 2010, and outsourcing contracts crossed €44bn, out of which BPO and IT contracts alone were estimated to be above €20m.

The services sector in India contributes as much as 52% to the GDP growth and includes BPOs, KPOs, IT companies, ITeS etc. Due to the economical crises in America and European nations, the Indian outsourcing industry has evolved. This is because global IT companies are cutting down on costs and are seeking more cost effective solutions by seeking cheap resources. These include several changes in corporate behaviours such as staff reductions, bringing in new decision makers, better payment management and simpler value propositions.

Of course, changes in pricing trends see American and European companies deflating pricing for globalization services. Large companies, especially those that work on long term engagements such as TCS, Satyam, Wipro, etc. are not adversely affected. In fact, Indian IT services companies will prove beneficial to recession hit countries due to their ability to compete better. Business relations between India and these nations will improve, as a result.

Recession essentially means the paying rates will come with approximately 20% profit margins, even to countries such as India who actively contribute to offshore software development. However,

A Forrester report said that though companies are now holding back their IT budgets to cut expenses, after some time, they may outsource more of their processes when cutting costs pressurizes them, in case the present recession settles to become a mild one. There is a general assumption is that outsourcing is likely to benefit from the credit crunch, but at the moment things are highly unpredictable.

A negative impact of recession is revised political and tax regulations, not to mention, visa and travel restrictions. This means a major decline in travel by offshore workers. However, anti-offshoring measures may be countered with newer policies such as free trade.

The Indian IT sector is dealing with Western recession in many ways. These include exploring the domestic market, improving internal efficiencies to maintain cost competitiveness and improving product portfolios. Experts say the focus needs to shift to non-dollar economies. At the same time, they are optimistic that this recession period won’t last for more than two or three years.

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