Impact of US Financial crisis on Indian Outsourcing Industry

September 24, 2008

From the beginning of summer 2008 there has been a slew of bad news in US that caused ripple effects across the globe. It all started with the housing subprime mortgage and now it trickled into the entire financial market. The US unemployment rate hits 6.1% and the industrial production fell to 1.1%, its largest decline in the past three years. The Indian IT and BPO companies get more than 60% business from US and 20% from UK, the rest comes from other European countries, Australia etc. With US already in recession and European economy edging towards recession, all these will affect the global economy.

Now let us discuss how the current US financial crises will affect the Indian outsource industry in the short-term and in long-term.

1. The IT and BPO outsourcing boom created a huge impact in the Indian economy and it increased the IT salary, cost of living, real-estate price, etc, ultimately the Indian outsource boom increased the outsource cost for the companies in US and UK. Of course, due to high inflation and tightening of monitory policies, Indian economy has slowed to 7.5% and it will definitively reduce salary of the IT professionals. Overall, it will reduce the cost for the western companies to outsource to India. In addition, the current Indian currency rate will motivate more US companies to use Indian outsource vendors for IT and BPO work.

2. Generally western companies look for offshore outsourcing to cut cost, with current turmoil in BFSI (Bank, Financial Services, and Insurance) US companies may not look for offshore outsourcing due to US election. It is very difficult for US companies to justify laying-off their own employees (100,000 and more) and sending jobs to India during the election year. Of course US election is a short-term and once it is over people’s sentiment and negative press attention towards offshoring will be over, but it will still hurt the Indian IT companies long-term growth prospects. Analysts are predicting Nasscom may miss $60 billion outsource export target for the year 2009-2010.

wallStreet Impact of US Financial crisis on Indian Outsourcing Industry

3. Several articles and research reports have been published about how Indian outsource vendors are climbing the outsource value chain from low value commodity outsource services to higher value (KPO) outsources services. In fact, C.K. Prahalad and M.S. Krishnan written a book about the future of outsourcing in which the authors discusses how companies can shine in global economy by hiring skilled workers (R=G) globally. However, western companies still see India has a low-cost destination for outsourcing lower-value bulk IT and BPO tasks. Indian companies have been getting more than 30% of their businesses from BFSI companies, and several of those businesses are high-value financial analysis, Insurance underwriting, equity research, etc. With the current turmoil in the BFSI companies, in short-term it will be difficult for Indian IT and BPO companies to make up the missed outsource revenues by going to different market verticals.

4. Current slow down in US will make the Indian IT and BPO companies to reduce their dependency to US and start marketing their services to other countries like APAC (Asia-Pacific) and Latin America and EMEA (Europe, Middle East and Africa). At this time, it is not clear how long it will take for Indian companies to penetrate into those markets, but the current US market will force them to act quickly.

5. In Wall Street all the investment banks are converting themselves to commercial banks, mergers and acquisitions of financial institutions will take place soon. This means no more lavish IT and BPO budgets for them to spend and this will significantly reduce the profit margin for the Indian IT companies.

6. Tire II IT and BPO companies in India may not withstand the US slowdown so they might consider merging with larger IT and BPO companies for their survival. This is specifically true for companies those who are doing outsource work for BFSI companies in US and UK.

7. As the global economy slows-down, companies will reduce their IT and BPO outsourcing which will directly impact the Indian outsource vendors. Indian outsource vendors have been hiring in record numbers for the past several years due to global outsource demand  and this has increased the Employee Attrition Rate in the Indian IT and BPO market.  As the global demand for outsourcing decreases Indian outsource vendors will reduce hiring new employees and they may lay-off bottom performers. This will significantly reduce the attrition rate there by reduce the overall expenses for the companies.

Fundamentally the outsource market is strong and it will not change due to this financial crisis. Western companies are started viewing India as a strategic place to not only outsources higher-value research work, product design etc, but also to sell their own products and services. Both the big five Indian outsource companies and several small companies are setting up niche vertical services to capture the growing KPO market. In the long-term once the dust settles in the US financial market, Indian IT and BPO companies will be in good position to attract more outsource work from the US businesses.


Comments

23 Responses to “Impact of US Financial crisis on Indian Outsourcing Industry”

  1. nand on September 29th, 2008 7:16 pm

    Hi Mani,
    The Economic Times published a story that tells US financial market issues will slow the offshore outsourcing market for Indian based companies. Forrester, John McCarthy told that the fundamental change in Wall Street will alter the outsource industry for the Indian IT and BPO companies. I’m not sure how much I can believe these analysts any more, all these times they couldn’t predict the financial market and now how can they predict the IT outsource market? Several reports have been published one report tells that current financial crisis will increase offshore outsourcing and other reports tells it will reduce it.

  2. Indian IT companies see opportunities amid global financial crisis | Outsource Portfolio on September 30th, 2008 5:54 am

    […] Fore detailed analysis and discussion visit the blog […]

  3. Mani on October 2nd, 2008 5:51 am

    Hi Nand,
    Thanks for posting the comments.
    I believe the fundamental for the offshore outsourcing didn’t change due to the current financial crisis in US. Still Indian and other outsource companies add value to the western companies by saving cost, increase process efficiency, decrease time to market, etc. However I feel in the short-term offshore outsource companies may see reduction in their revenues due to financial industry consolidation and mergers. This might be a good time for them to see their employees and reduce it based on their performance, which will help them to increase their efficiency in serving their customers. This time around they can also see other regions like Europe, Japan, Gulf countries, etc, to market their IT and BPO services which will reduce their dependency from US companies.

    The Indian market has significant potential for outsourcing, not sure why the Indian companies are not taking advantage of it like IBM, Accenture, etc

  4. Mark on October 3rd, 2008 6:13 am

    Mani, you didn’t discuss about Legal Process Outsourcing (LPO) due to US financial issues, I think due to company mergers, bankruptcy filings, and acquisition there will be good opportunities for LPO vendors in the short-term. LPO vendors can help the western financial companies in litigation, bankruptcy proceedings, contract drafting, etc.

    For more details you can read the news at Hindu Businessline

  5. Mani on October 9th, 2008 8:54 pm

    Hi Mark,
    I read some news about LPO market growth but not sure how for the LPO market will increase due to the global financial crisis. Now the US government bail-out from Tax payers money it will be very difficult for US financial companies to send more jobs to India. There will be lot more analyzing the actions of US financial institutions by the media and public, there will be backslash on the offshore outsourcing in the short-term.

    I have read several reports on the impact of global financial crisis on outsourcing found mainly two types of assessments that paint two different pictures. One type of reports predicts the end of offshore outsourcing and the other predicts offshore outsourcing will increase once the dust settles in the global financial market.

  6. Outsource on October 13th, 2008 4:19 pm

    Hi Mani,

    I don’t think the offshore outsourcing will decline; in fact the current economic condition is the right time for offshore vendors to get more business from US and other western countries. TPI, global sourcing advisory company’s Peter Allen gave interview in BusinessLine and he mentions that this year is great for outsource deals and he predicts that there will be no change in the existing outsource deals in terms of price reduction and contract renegotiation.

  7. Outsource on October 20th, 2008 4:05 pm

    I agree with the blogger that India will benefit from the current financial mess in the Wall Street. After the dot-com bust Indian IT and BPO industry has seen tremendous growth and I’d see the same scenario for all the offshore outsource vendors. Read the news; recently Infosys won $15 million outsource deal from the Union Bank of California. I also predict China and Philippians outsource vendors will grow significantly in the next couple of years by wining projects away from the Indian outsource vendors.

    http://economictimes.indiatimes.com/Infotech/Infy_pips_TCS_to_bag_15_mn_US_order/articleshow/3616454.cms

  8. Outsource on November 9th, 2008 1:51 pm

    Hi Mani,
    I do not agree with you that the outsource will slowdown in the short-term. In fact, it will accelerate in the next few months. Every company wants to cut expenses and save cost, offshore outsourcing is the best way to do so. Cost saving and offshore outsourcing goes together, and all fortune 1000 companies’ executives will consider IT outsourcing as the best way to save money and still run the business efficiently. Look at the report all the research companies EquaTerra, Forrester, and TEAM International predicts offshore outsourcing will grow in the coming months.

  9. saba on November 13th, 2008 12:44 pm

    HI,
    I liked your writing, I want you to help me with a topic, impact of global financial crisis on Indian economy. I have a seminar on this topic by this tuesday.

    Thanks

  10. Beem on November 19th, 2008 10:20 pm

    I also agree with the previous commenter, Big Indian IT outsource companies (TCS, Infosys, Wipro, Satyam, HCL and Cognizant) have huge pile of cash to stay competitive until the US economy emerges out of recession. During the recession time they may also buy other struggling IT outsourcing companies to boost their profit margin. Check out the news http://www.businessweek.com/globalbiz/content/nov2008/gb20081119_935197.htm?chan=globalbiz_asia+index+page_top+stories

  11. yatin on December 3rd, 2008 1:20 am

    Whats Impact of financial crisis on outsourcing in Indian banks

  12. test on December 4th, 2008 9:00 am

    Labor arbitrage outsourcing is dead
    I think outsource providers who can provide business value to their customers will survive in this bad global economy. Several small and mid-sized outsource providers who have been thriving on labor arbitrage will not succeed. They will either close or merge with each other to stay in business. Bottom-line providing outsourcing services purely on “cost-savings” only cannot succeed in this economy.

  13. Kris on December 21st, 2008 2:49 pm

    Hi,
    I don’t agree you’re your statement that in short-term outsource business will slow-down for Indian companies. In fact any time economy slows-down, first thing companies do is to reduce their business expanses and outsourcing is the best way to cut cost and improve productivity. For companies those who are already outsourcing will increase it and companies those who are not current outsourcing will start doing it to stay in business.

  14. Mani on December 31st, 2008 7:51 pm

    Kris,
    Thanks for the comments. I’m pretty sure that business for all the outsource firms (including Indian outsource firms) reduced significantly and it will continue for some time until US economy recovers from its current recession. Every day I’ve been reading reports that tell how Indian based BPO and IT outsource companies are struggling to keep the business alive. See the following recent news
    http://economictimes.indiatimes.com/Infotech/IT_majors_job-hunting_for_employees/articleshow/3916848.cms

    http://us.rediff.com/money/2008/dec/31it-sector-hiring-may-drop-by-half-next-year.htm

    -Mani

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  16. Promodh on January 7th, 2009 3:38 am

    Good article.

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  19. KPO services on March 7th, 2009 4:36 am
  20. Mohan on March 25th, 2009 6:03 pm

    To be quite open, nobody knows when the recession will end. This is not a periodic downturn in the business cycle, but a fundamental depression comparable to the 1929-1933 depression which ended with WW 2 and the reconstruction efforts in Europe and Japan after the war.

    As for the Indian BPOs, the reality they have to face is that, the outsourcing is taking place at a time of shrinking economies – the BPOs will operate to cut costs, but not stimulate expansion- . What will the engine of growth be out of the recession – no one knows, least of all the USA or its mainstream economists.

  21. Growth of Knowledge Process Outsourcing (KPO) | Outsource Portfolio on May 17th, 2009 7:44 am

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  22. Suyati on September 25th, 2010 2:27 am

    Thanks for sharing your insights! Indeed the Indian outsourcing industry went through a critical phase during US Financial crisis period. The period witnessed some opportunities as well. I believe that was great time to invest in innovation – to change the DNA of the industry which is still rooted in the dot.com era. Companies were busy with layoffs as the global demand went down for the Indian outsourcing services.

  23. Suraj Bhatia on September 6th, 2012 8:48 am

    Some time we have Circumstances where management of NPA is a difficult Task. Therefore we are focusing on a NPA Management Software, So that it will help us from the Problems like managing asset sales like Tendering. Bidding, comparing and valuation.

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