What will be the effect on the company business strategy if the financial crisis will hold on? Will we get worlds wide in a situation where you will see that the management will say “let’s do less with less”.

In several of the core markets served by offshore vendors, the current business slow-down is reducing demand for the underlying services, no matter who is providing them. Fewer mortgages are being processed, fewer plane reservations are being made, and fewer people are purchasing high-tech solutions that require technical support.. Why this happens? Because companies are scaling back their budgets, governments having huge dept and customers don’t have the same money to spend as before.

Report about the outsourcing market;

• In a Goldman survey from August 2007, tech execs said that outsourcing was their 10th highest priority. In the report is also described that the IT spending index, based on a survey of 100 IT execs at Fortune 500 companies, came in at 65, down from 71 in the prior survey in April and below the year-ago mark of 73. In hard numbers ; 33% of tech leaders said they expected their tech-services budgets to shrink. Only 16% of businesses expect to increase spending on these services.
• The Indian National Association of Software and Services Companies forecast revenue growth of 21 percent in 2008, down from 28 percent in 2007.

These signs can’t ignored and will have their effect on the off shore of work.

Outsourcing (off shore) has historically been predicated upon the notion of “doing more with less” but what if the company is in a high need of cash (look at the financial sector). Naturally you will tell me that off shore - is a good way for businesses to cut costs. That pattern may nevertheless slow in a downturn. For an organization in need of cash it’s easier to make a quick win on simply cancel projects where they maybe previously hired cheaper foreign labor to perform.

On other reason that we on the declining of the ROI by offshore is the higher labor cost and external cost (exchange rates, flight cost, living etc.). If we focus specially on India we see that they are becoming a victim of there own success and this has very significant downrate on the off shore service provider companies. People are constantly moving between companies for better jobs and more money. People with good English language skills are being moved up the value chain in order to earn higher salaries and for their employers to retain them.

This is causing two problems for the Indian service providers. Firstly the language skills of people in the offices has deteriorated quite significantly due to movement up the value chain and oversubscription of these services. Secondly, salaries in India are increasing at an alarming rate with some estimates as high as 17% annually although I would put the estimate at around 10>15%.

This effect is specially visible for the American market where the US dollar is decreasing against the Rupee. Why make extra cost when “local” people get cheaper by the day and where you don’t need “special” agreements with a offshore partner? Special in America where you can cancel a project and dismiss your personal without a problem.

Is the European market very interesting for offshore companies? The strong Euro (against almost very currency) can save you directly in your wallet… But where the Americans overspend the europeans are to careful, so also our economy is coming to a hold. This effect and the decline of the value of the companies on the stock market will make the CEO think twice to off shore work. When he will  set-up project local of near shore he don’t have to worry about long-term agreements or transforming his organization to be able to work with a offshore partner (hidden cost of off shore etc.)

The global anti-globalization sentiment could be the last straw. "As the global economy stalls and protectionism rears its head, we could see a significant number of companies move operations back onshore," Hudson said. "Businesses are becoming a lot more risk-averse and there is a sense that outsourcers in India and China will have to redouble their efforts to win new contracts."

My personal view is that the local off shore vendors (in Europe) will push more on the setting up projects with India to lower their loan costs and being more flexible on their personal size (The European laws on discharging personal are very strict, and costly). The pure Indian players want to benefit from the strong currency and move slowly out of the US.

Are there any winners.... maybe the customer? He will be in a situation of “doing less get more”