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MUMBAI, India, April 24, 2008 View All Press Releases

Gartner Says Economic Slowdown in the US to Accelerate Offshoring of IT Services

India Will Remain the Dominant Location for IT Offshore Services for North American and European Buyers

In a recently published report, Gartner said that the current U.S. economic slowdown will lead buyers of IT services to consider increasing the percentage of their labour in offshore, lower-cost locations. India will remain the dominant location for IT offshore services for North American and European buyers as a result of its scale, quality of resources and strong presence of local and traditional service providers.

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.

“Factors that will give India the edge over other offshore locations are scale and quality of labour. North American and European buyers of IT services have been the force behind a growing offshore services market and India is central to almost any discussion of offshore services delivery for these buyers”, said T J Singh, research director, Gartner. “Whether it is the indigenous India-centric service providers that have a wide-reaching impact on the IT services sector, or a vast and growing IT labour pool being trained to support a global client base, India will continue to be the most-sophisticated country option to source offshore IT services in the near term.”

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).

According to Allie Young, vice president and distinguished analyst, Gartner, “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.”

In the worst case scenario, if a more sustained economic slowdown leads to a prolonged recession in the US and possibly other global economies, Gartner expects a more-aggressive movement to cut IT budgets.

“Again, buyers will aggressively move toward offshore destinations and service providers that can offer a global delivery model to access lower-cost IT labour 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 cancelled”, said Ms. Young. “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 labour costs, among other benefits”, said Arup Roy, senior research analyst, Gartner. “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 labour costs.”

According to Gartner, while the recent appreciation of the Indian rupee and rising wage rates have made some of the long-held benefits of India’s offshore services’ cost competitiveness less predictable, the more sophisticated providers have made critical process investments, thus minimizing the impact of wage increases alone in their final price of services to buyers.

Additional information can be found in the report “Offshoring IT Services Can Cut Costs: Options for a Potential Economic Downturn” which can be found on Gartner’s Web site.

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