When it comes to IT offshore outsourcing, the state of the US economy plays a significant role. Your onshore, offshore, or nearshore strategy will be influenced by exchange rates, interest rates, IT employment levels, and even domestic commercial office vacancy rates. America is becoming increasingly reliant on low-cost offshore services. So what is an offshoring decision-maker to do to contain costs during this economic downturn in the United States? That is contingent upon the economic cycle’s impact on your business. Due to the fact that consumer spending drives the economy up and down, recent weakness at Tiffany and Target indicates that both ends of the consumer spectrum are being impacted, indicating that we may be in the early stages of the cycle. According to Joseph H. Ellis in his article “Understanding the Economy” (December 2007 issue of Inc. Magazine), “People are concerned about the impending recession. However, by the time one arrives, the majority of economic harm has already occurred.” He advises not to be afraid to conduct your own economic sleuthing. You may gain a new perspective on previously unknown cyclical patterns and cause-and-effect relationships. Consider the following four indicators.
Exchange rates: Analyses of major destinations for IT software outsourcing reveal that the majority of their currencies have appreciated significantly against the US dollar. This resulted in either an increase in client costs or a decrease in revenue for offshore providers. In a country like India, which controls 70% of the global business process outsourcing market, the Indian Rupee appreciated approximately 11% against the dollar, from an average of 44.21 Rupees per dollar in January 2007 to a monthly average of 39.37 in December 2007. From January to December 2007, currencies in nearshore outsourcing destinations such as Canada and Brazil appreciated by 15% and 16%, respectively, against the dollar. This results in an increase in the cost to you, the buyer, or a decrease in revenue for the outsourcer. When reevaluating your outsourcing strategy, currency exchange rate risk is an issue that both parties to the agreement should discuss, rather than hoping for the best.
Interest rates: Interest rates can increase, decrease, or remain constant. Occasionally, we overlook the fundamentals. The Federal Reserve appears to be attempting to maintain artificially low interest rates, which is exacerbating the dollar’s decline. The outcome is invariably inflationary. If they fight inflation, interest rates will rise, resulting in a stronger dollar. If you require capital, the window of opportunity for low-cost borrowing may be closing, even if you are able to obtain it. Maintain cash at the short end of the yield curve to hedge against future rate increases. When reviewing your strategy, keep in mind that if the government’s interest rate adjustment strengthens the dollar, offshore services will become more affordable; however, if you rely on short-term borrowing to meet payroll, your onsite service costs will almost certainly increase.
Employment in information technology: According to the United States Department of Labor’s Bureau of Labor Statistics, computer software engineers are one of the occupations expected to grow the fastest and add the most new jobs between 2006 and 2016. Employment levels for computer professionals are currently at a record high, with unemployment in this profession estimated to be around 2%. Outsourcing to other countries may help to moderate this employment growth. Numerous businesses will save money by outsourcing to countries with lower prevailing wages and highly educated workers. However, high-quality jobs in software engineering require computer professionals who are proficient in programming, systems analysis, and interpersonal communication. As a result, rising wage pressure will become a long-term strategic issue, regardless of whether you are recruiting professionals domestically in a near-full employment market or recruiting professionals offshore, where experienced professionals demand higher wages in their currencies relative to a weakening trending dollar.
Additional office space is required to accommodate additional IT staff. On January 1, 2008, real estate research firm Reis reported that office vacancy rates in the United States increased for the first time in four years. In the fourth quarter, completions increased to 19.6 million square feet, the highest level in nearly seven years, up from 8 to 12 million in the previous two years. Effective rent growth has fallen short of asking rent growth for the first time since the fourth quarter of 2004, and concessions have widened. In this market, leasing additional office space for an expanding IT services and development team may be more affordable than ever. However, facilities will always be a factor in the cost equation. When deciding whether to house a large or small team offshore or onshore, consider all of your costs, including facilities, utilities, network access, and other expenses associated with housing a large or small team. Certain emerging markets, such as Panama, have an excellent infrastructure and government policies that encourage technology companies to locate there.
Regardless of where you are in the cycle, the goal of cost reduction and quality improvement is always the same. Outsourcing can assist you in accomplishing that goal. There is a clear growing trend for businesses of all sizes and industries to outsource some aspect of their operations. George Schildge, president and CEO of Matrix Marketing Group Inc., believes outsourcing is not a passing fad but a paradigm shift that has the potential to transform a business model. According to SearchSoftwareQuality.com, two themes for software development trends in 2008 are that outsourcing will continue to impact more people and that business analysts and project managers will need to learn how to deal with the challenges of distribution across countries and continents. According to Bas de Baar, a project manager and author of “Surprise! You are Now a Software Project Manager,” Different cultures, time zones, languages, and customs will have a greater impact on software projects than in previous years.
Profitability this year will require a shift in strategy. Outsourcing will play a greater role in the equation in the future, so do your homework now and take action to stay ahead of the curve.
Since 2004, Vision TRE has aggressively sought out IT professionals with superior English skills in Brazil, Panama, and Ecuador and has offered their offshore services in advanced programming skills such as.Net, ASP, C++, C#, Microsoft SQL, Oracle Applications, Oracle DBA, Crystal Reports, Visual Basic, and network engineering to US clients. We currently have a large pool of skilled professionals available to meet the demand for any popular programming skill set.