The Current Global State of Outsourcing

Includes: CVG, INFY, VCTL
by: Outsourcing Insider

By Audrey B.

The differences in the current outsourcing clime among different regions in the world have become as stark as black and white this past month. Different events around the world have contributed to the current climate and while some may feel relief, some are also feeling the pressure.

India’s Woes

In a move that currently has Indian outsourcing companies abuzz; the state of Ohio in the US has banned the offshoring of projects by government departments. In an executive order by current Ohio governor, Ted Strickland on the 6th of August 2010, the governor banned the outsourcing of services paid with state dollars, which said that, “Ohio’s policy has been - and must continue to be - that public funds should not be spent on services provided offshore.”

Indian personalities, companies, and publications meanwhile, have expressed varying degrees of dismay over the move. Indian outsourcing trade body, NASSCOM, on the 8th of September, labeled the move as ‘discriminatory’ and a ‘trade barrier’, commenting that the move would be counter-productive to the US government’s initiative to reduce public deficit. Even outsourcing company, Infosys (NASDAQ:INFY), has expressed their concern over the move. Kris Gopalakrishnan, Infosys CEO and Managing Director, has said that the company will be negatively impacted by the move.

This development comes just after a controversial legislation, the border security law, was passed on the 12th of August in the US. The legislation increases the H-1B and L1 visa fees of which Indian companies partake of a large portion. According to Kaufman Bros. analyst Karl Keirstead, the law could add up to $15 million in added costs for companies such as Infosys, who file about 7,000 to 8,000 visa applications and renewals per year.

China Forges Ahead

Amid woes from the Indian outsourcing sector, China is speculating that India is becoming increasingly wary of the competition from the country.

According to KPMG partner Egidio Zarella, “the Chinese outsourcing sector is bound to see the same curve the Indian industry had before — they are in for incredible growth.”

In an effort to foster growth in the outsourcing industry, China, on the 11th of August, announced that they will not be levying operating taxes on offshore service outsourcing business in 21 cities until 2013. The policy covers firms specializing in IT outsourcing, business process outsourcing and knowledge process outsourcing. The initiative is expected to boost China’s already robust growth in the industry, where the country enjoyed a 21 percent year-on-year increase to USD 23.6 billion in 2009.

Analysts speculate however, that India has no reason to fear China as of yet, considering that statistics for Chinese companies’ show that China’s numbers are but a small fraction compared to those of India. In terms of headcount, 10% of Tata Consultancy Services’ [NSE:TCS] current employees already outnumbers all of China’s outsourcing companies; while revenues from China’s largest outsourcing firm, Neusoft, reported revenues that were less than 10% of TCS’ revenues.

The potential though, is where China shows an advantage.

The Philippines is Unfazed

After the hostage crisis that happened on the 23rd of August, one of the primary concerns that the country had was whether the event would jeopardize the country’s outsourcing business. As it turns out, it hasn’t.

In a press briefing by Philippine President Benigno Aquino III, the country’s growth prospects were not derailed by the incident. “We were not derailed. I’m happy to report that economic and business prospects are still bright,” he said.

Cited were the current plans for expansion of business process outsourcing company, Convergys (NYSE:CVG). The company plans to expand its workforce in the country by 5,000 people. The company currently employs 17,000 people in the Philippines.

Other outsourcing companies have also announced this month that they will be expanding their businesses. Rainmaker Systems (NASDAQ:RMKR), a business process outsourcing telesales services company, announced an expansion of their workforce on the 1st of September by 412 people, with a targeted increase of 2,012 people in the near future.

Fellow outsourcing provider, Salmat [ASX:SLM], which is an Australian-owned company, also announced plans to expand. The company announced on the 7th of September that they will be increasing by another 200 people in a new site in the city of Taguig. The new employees would be serving clients from countries in Australia, New Zealand and Japan.

These recent events show just how changeable the state of outsourcing is currently. It will be interesting to see what comes next in the coming months.

Disclosure: No positions