The multinational Hackett Group found that there was still significant long-term opportunity for continued business growth in India, as companies in North America, Europe and industrialised Asian markets struggle to reduce costs and drive higher effectiveness.

This they do by primarily outsourcing various areas of business to Indian and other low-cost labour markets. “But in response to the threat of an economic downturn, many companies are hitting the pause switch on their globalisation efforts,” said Hackett Globalisation & Outsourcing Practice Leader Julio Ramirez.

Higher efficiency

“Interest in off-shoring is still high, and the best companies are moving forward with projects that combine globalisation with strategic process transformation,” he told reporters.

“During recessions, the best companies focus their efforts on rapidly driving higher efficiency in back office processes, freeing up excess working capital, and enhancing their enterprise performance management systems and processes,” Mr Ramirez said. “These companies will use the economic slowdown to accelerate their outsourcing initiatives, increase the scope of existing contracts, or in the case of in-sourcing, push more work to their offshore captives.”

However, the study of prior recessions show that as the threat of a recession deepens, many companies will switch their attention to operational and financing challenges, often resorting to simplistic solutions that are not sustainable and may in fact weaken competitive positioning, he said.

Most offshoring projects require an upfront investment for contracting, set-up and transition that can result in a neutral to possibly negative impact on short-term expenses and many companies will choose other tactical moves that provide paybacks over the next 12 to 18 months, he added. “In addition, escalating wages and currency appreciation in India have also generated questions on sustainability of cost savings, adding to the debate on the speed and timing of such strategic moves.”

Hackett said that a possible recession would drive greater interest in globalisation by the Global 2000 companies.
However, factors like inflation, wage rate changes and currency movements, upfront project of transaction costs, productivity improvements and attrition might work against greater flow of offshoring to India in the short-term, Mr Ramirez said.