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After a year of incredible change locally and abroad, we take a look at some of the key factors influencing growth (or lack thereof) in the offshore IT industry.

1. The Enron Effect
The recent revelation that Satyam hid a cash shortfall of nearly a billion USD shook the offshoring world, and its true impact has yet to be seen. There is precious little to be optimistic about in the near term, but strong, progressive steps taken by both the outsourcing industry and the Indian government could certainly limit the damage - IF this truly is an isolated incident. Still, considering that demand for outsourcing services is weakening, and western unemployment is rising, this is the worst possible time for people to lose confidence in India. Karl Flinders, of computerweekly.com, sums it up well, "India has had its first corporate scandal of global significance and, regardless of the challenges facing Satyam, the Indian IT outsourcing industry will need to fight hard to retain its clean image."

2. Legislation
When unemployment begins to grow, governments tend to step up rhetoric around keeping jobs at home. President-elect Obama's protectionist ideals have been quoted often, but as Ron Hira of the Rochester Institute of Technology states, "Alas, the reality is that Mr. Obama has not backed up his rhetoric with a plan to create and retain jobs here. His proposals on tax deferment and a 1% tax credit for so-called "Patriot Employers" would have an insignificant impact on what is a major structural shift in how the economy operates. And early indications are that Mr. Obama is not going to make either of these proposals, which would face fierce political opposition from companies, a priority." Further, as of mid-January, the UK hasn't yet seen a similar sentiment emanating from the Brown administration. The reality is that Western economies cannot risk the loss of competitiveness that would result from true protectionist measures. If market factors continue to bring down the cost of local technology labour, however, companies will naturally have a tougher time making the case for offshoring.

3. Currency Impact
As end-user currencies rise against outsourcer currencies, services become cheaper. Large, longer-term deals will generally involve some level of currency hedging on both sides, but the appetite to offshore may be heightened or tempered by recent rates. In a dramatic reversal, the US dollar is near a 5-year high against the rupee, and the Euro is just off. The pound, however, is down over 15% on its recent historical average of around 80 rupees. This is exasperated by the Pounds sharp loss in value to the US Dollar - the currency in which larger outsourcers measure their earnings. In the past, this may not have led to significant price changes as demand was high, and pricing was often set within the end-user country. While offshore providers generally employ forex hedging to reduce variation, in an environment of lower demand, and shorter deal durations, consumers in Europe and the US may well benefit from bargains in the near term.

4. Supply & Demand
While offshoring provides a very effective tool in reducing costs - few things cost as little as doing nothing. Decisions on IT outsourcing expenditures are being pushed back as companies wait and see how the downturn will play out. A couple of examples noted by Arpit Kaushik, of cio.com: "Patni has reduced its guidance owing to a general build-up of deferred decisions of cancelled projects." and "...Hexaware has experienced "some pricing pressure, (and) a circumspect approach from some clients". The big question is whether or not companies deem these deferred programmes as completely discretionary - the answer to this will result in either a bump in second half IT spending, or a long-term reduction in overall demand.

5. Other Factors - Consolidation, Secondary Locations
Its hard to say whether or not the current situation lends itself well to consolidation and secondary locations. As for consolidation, more and more Indian outsourcers will be takeover targets as they over-leveraged to keep up with the growth seen through the last 10 years. Similar needs will likely help continue the trend of Western companies selling their captive centres. While most companies are taking a "wait and see" approach with virtually everything, those outsourcers with strong cash reserves could make a number of big plays in the second half of this year. As for secondary locations - its hard to see how an environment of softening demand can help. Rapidly rising costs and employee churn were two of the most common reasons people were looking outside of India for offshore IT services. Both of those problems should naturally decrease as the job market in India cools. Conversely, the growing number of businesses exploring other locations in search of better language, geographic, cultural or capability-fits shouldn't be deterred.

In summary, there are many factors weighing against offshoring in the short term, and it will likely take at least two quarters (at a minimum) before we see things begin to pick up. The next few months represents a good opportunity for client businesses to really assess their offshoring strategies, evaluate potential partners, and prepare for executing a well-governed longer term strategy. It makes sense to minimize spending until the last possible minute - but a solid plan will avoid the failures that will inevitably result from the mad-dash, reactionary offshoring that is likely to take place later this year. 

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