Political unrest and economic trouble versus offshore outsourcing

The recent bomb attack on Mumbai, killing at least ten people and wounding more than fifty, is one in a series. According to Wikipedia are “as of 2006, at least 232 of the country’s 608 districts afflicted, at differing intensities, by various insurgent and terrorist movements. In August 2008, National Security Advisor M K Narayanan has said that there are as many as 800 terrorist cells operating in the country”. While India is not the only outsourcing destination which suffers from ‘political’ unrest, are this bomb attack and the 10 coordinated shooting and bombing attacks of 2008 of a completely different order than what is going on in most other countries (except for maybe Pakistan).

Also Egypt had its period of unrest when toppling over president Mubarak, and Malaysia recently caught the headlines with people demanding democratic reforms. And the Ministry of foreign affairs of Australia “advise you to exercise a high degree of caution in the Philippines because of the high threat of terrorist attack and the high level of serious crime”. While these last examples are magnitudes different from the situation in India, is it an indication that several popular offshore destinations end up in news papers in a less than favorable way.

While the impact on the short run is likely to be very limited, may long term unrest in combination with continuing economic struggles in the United States and Europe have an negative impact on offshore volumes. In the United states some 8 million jobs were lost with financial services accounting for 800.000 of them. In Europe unemployment is not much better with especially Southern European countries suffering from rates up to 21,3% in Spain.

With the supply of skilled people surpassing demand in both the U.S. and Europe, wages tend to stabilize or even decline. Of the people who lost their job in the U.S. between 2007 and 2009, had 36 percent to accept a job which pay was at least 20 percent less than their previous job. At the same time are wages in India, Sri Lanka and Bangladesh expected to show a double digit increase in 2011.

In manufacturing this has already resulted in many American companies insourcing their production again. But “homeshoring” is also picking up in the service industry. Arise employs more than 7000 call center American agents who work from their living rooms and connect via telephone systems to national service lines. At the same time provides the U.S. government tax incentives to keep jobs at home and some states (e.g. Ohio) even ban offshoring. In Europe, the social security system prevents large wage fluctuation, but also over here are people accepting jobs with at lower pay grades.

Subsequently do I wonder whether we will see lower (growth) figures in new offshore contracts for the coming two or three years. Because a) the labor surplus in the U.S. and Europe will not be absorbed anytime soon even with economic growth slowly picking up, b) the battle for talent in India and other destinations will continue to push wages further, and c) the unrest in India, Pakistan, Philippines and other countries does not show any signs of subduing.

Simply stated: the financial benefit of offshore is getting smaller, while the risk profile is growing. Two trends which might result in corporate decision makers steering for (a larger share of) local outsourcing.