Effects of US Economy on Outsourcing

The US economy is vastly involved in most of the world economies and any major slow down sure does lead to a global recession. Slowing down of US economy means that most companies, industries and organizations in US that normally outsource are now evaluating the recessionary trends, which in turn automatically translates into more interest in offshore outsourcing. Outsourcing is usually a strong business proposition in good times, and it’s an even stronger proposition when bad times last. Offshoring will grow over the long term, as it drives at cost savings.

With advert of the outsourcing boom, many IT/ITES companies have been riding the wave of outsourcing, growing by leaps and bounds. Major low-cost outsourcing destinations like India, Ireland, South Africa, Philippines have benefited from outsourcing, especially by companies from the USA. It was like the outsourcing industry around the world was run as a subsidiary of the US/European economy. However, since last 6 months, the US economy has undergone major changes. There has been a severe crisis hitting the economy, with the US dollar value depreciating at record levels.

The credit crunch again might have a positive or negative effect on the outsourcing industry. Downturn in the US economy plus possible recession means technology and outsourcing as solutions to the need to slash overheads and minimize any negative impact on the bottom line. The truth is that the US economy is at an unpredictable tipping point. If a very serious recession hits, then companies might actually scale back on outsourcing resulting service companies having lesser customers. This translates companies’ needing less service provision and therefore believing that a scaled-down internal team would suffice as opposed to an outsourced department.

In the IT Industry, operations that will inevitably be scaled down in a time of recession could be the outsourced operations just as easily as the internal processes. The nature of outsourcing deals might change too. Before, the mega-deal has been consigned by many to the outsourcing scrap heap, in favor of multi-shoring and choosing separate suppliers for each process.
Recession focuses on to cost as a more decisive factor in outsourcing (with more emphasis being placed on service levels and quality) and thus having one outsourcing supplier minimizes management, due diligences and supplier selection costs. Having one supplier should also provide the end user with the outsourcing equivalent of savings achieved by buying in bulk.There might be reduction in the number of fixed price contracts in favor of cost per unit, as end-users want to link the cost of supply with volumes (or reduction in volumes of course!).

Most companies are now holding back their IT budgets to cut expenses. However, after some time, the companies may outsource more of their processes when cutting costs pressurizes them, and with the present recession settle for a mild one. There sure will be a marginal fall in growth rate for outsourcing. On the broader spectrum, the general assumption is that outsourcing is likely to benefit from the credit crunch, but one can never tell as things are highly unpredictable at the moment.