Offshoring in a Fluid World

Cost Reduction Opportunities Are Viable as Ever, Despite Economic Crisis and Changing India Outsourcing Landscape

CHICAGO, February 17, 2009 — While the economic crisis and changing offshoring environment will require strategic adjustments, companies that carefully choose solid vendors and negotiate the right deals will still find the significant savings their shareholders are looking for.

According to global management consulting firm A.T. Kearney, the changing economic environment offers U.S companies increased buying power in creating new and revising existing outsourcing contracts. Despite currency fluctuations, declining growth in the Indian economy, changing Indian labor rates and the recent accounting scandal at Satyam, the environment for outsourcing is actually quite favorable.

"With virtually all companies facing budget constraints, outsourcing and offshoring are obvious options for savings," says Arjun Sethi, A.T. Kearney partner and co-author of Offshoring in a Fluid World: The Economic Crisis and the Indian Offshoring Landscape, a newly published business paper. "But there are several actions that companies must take to reduce their risks and maximize their opportunities.”

• Look for the best price. Due to weakened demand and the currency effects caused by the increased value of the U.S. dollar and Japanese yen, vendors are becoming more flexible about pricing. Buyers should capitalize on this, both when it comes to pricing on existing contracts and new business.
• Find a better deal structure. The constrained capital environment and increased vendor flexibility should allow companies to structure offshore arrangements in new ways, thus limiting the significant up-front investments of traditional agreements.
• Increase the rigor of due diligence. The Satyam accounting scandal is clearly a grave situation, especially considering that company’s scope in the industry, but we do not believe it is symptomatic of the outsourcing industry in general. It does, however, underline the need for buyers to increase the rigor of their due diligence when it comes to their potential suppliers’ financial stability and viability.
• Seek out the best vendors. Larger, established vendors with diversified customer bases will be the more attractive options in this environment. Companies exploring opportunities to expand their existing offshore relationships can also take advantage of vendors’ recent capacity improvements.
• Share capital costs. We have seen vendors either waive portions of the start-up costs or agree to amortize such costs over the life of the contract. Limiting capital costs can make offshoring a more attractive option.
• Limit exposure to risk. Leading companies are analyzing their current footprint to limit risk of overconcentration (with one country or vendor) and are re-examining their disaster recovery capabilities and contract obligations after the Mumbai attacks of November.

“Most clients we work with insist they will only consider Tier 1 vendors as potential suppliers, and many operating officers have even begun the search for alternative contractors outside of India,” Sethi explained.

Outsourcing Is Still Important

Outsourcing is at a crossroads, its growth is slowing but its importance is still strong. Economic conditions are certainly making the environment riskier, and IT and business process managers are paying increased attention to the stability and safety of their offshoring interests. At the same time, considering the economic conditions and the maturation of the outsourcing industry in general, offshoring will be an even more critical arena for cost-conscious companies trying to save their imperiled profit margins.

“Beyond price, suppliers are showing more willingness to share both the capital costs and the risks associated with project startup and transition; these are compelling incentives for companies given current capital constraints,” concludes Kenneth Lee, A.T. Kearney partner.

The Offshoring in a Fluid World paper is available at the following link: www.offshoringfluidworld.atkearney.com

About A.T. Kearney
A.T. Kearney is a global strategic management consulting firm known for helping clients gain lasting results through a unique combination of strategic insight and collaborative working style. The firm was established in 1926 to provide management advice concerning issues on the CEO's agenda. Today, we serve the largest global clients in all major industries. A.T. Kearney's offices are located in major business centers in 35 countries. Further information can be found at www.atkearney.com.