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.
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.