DMITRY LOSCHININ, PRESIDENT & CEO OF LUXOFT, COMMENTS ON THE GLOBAL DEBT CRISIS AND ITS IMPACT ON THE OUTSOURCING INDUSTRY AT LARGE
Dmitry, what do you think will be the implication of the global debt crisis on the outsourcing market?
DL: Despite uncertainties that will persist until the debt crisis further unfolds and potential solutions are developed, the global outsourcing industry outlook remains strong as service providers worldwide continue to report growth and new client wins. However, the outsourcing market may see a short– to medium–term impact in locations where service delivery results cannot be justified as a strategic motivator for a client’s business. That being said, in times of heightened economic concern, it is commonplace for companies to make staff or department reductions to conserve critical funds. When downsizing occurs, management is required to fill the void left by the displaced workers, and as a result, opportunities for the outsourcing industry emerge, particularly in IT. Companies like Luxoft, that employ highly trained, skilled and certified software and application engineers across the globe, greatly improve traditionally slow and ineffective project transitions that historically impact clients. Outsourcing providers like Luxo! that are able to quickly and seamlessly step in to help companies meet key needs will see a significant return on this opportunity.
How will it affect the demand in the U.S. and Europe?
DL: While downturn periods o!en result in challenges, they also create added opportunities for companies like ours. In our view, long-term trend of demand for outsourcing services in the U.S. and Europe is likely to remain within its current growth trajectory. During this time, the need for cost–effectiveness, process efficiencies, as well as high–end application and product development expertise is more critical than ever, particularly if staff reductions are involved. Despite budget constraints that we will likely see from organizations across industries such as banking and financial services, quality of work remains an extremely powerful motivator for companies seeking outsourcing services. For many organizations, Eastern European locations in particular strike the right balance of domain expertise, reasonable price–points and close cultural similarities to Western European and U.S.–based operations.
What will be the impact on other global locations?
DL: Though India is one of the top destinations for ITO and BPO outsourcing services, it is also a region that is perhaps one of the more at–risk locations versus other countries. In fact, Infosys, India’s
second largest so!ware services exporter, recently reported that European–based clients were taking a longer time to sign IT service contracts, due in part to Eurozone debt concerns. In addition, Indian–based IT outsourcing providers face additional challenges that Eastern European companies do not. First, many companies engage with Indian service providers for very specific labor outsourcing roles. Because these engagements tend to fall into the non–strategic realm, they are easier to cut should budgets reductions need to occur. Secondly, during downturns companies will often stop or delay megaprojects such as ERP implementations and large infrastructure updates. Many Indian outsourcing firms have substantial part of their revenue in such deals putting them at risk for budget cuts and contract re–negotiations.
Will service providers alter strategies in the near future as a remedial measure?
DL: The ability to prove and deliver value to clients will be vital for so!ware development partners moving forward. In response, it is possible that the industry as a whole will adopt more flexibility in contract negotiations that will help foster stronger relationships between clients/outsourcing organizations.
How will the uncertainty affect other areas like deals with customers, investments decisions, pricing models, etc.?
DL: Increased flexibility will be fundamental to helping global IT service providers weather the storm and position themselves for continued growth despite fluctuating market conditions. Because budgets are such a significant factor for companies seeking relationships with technology services providers, large outsourcing companies will also have to remain competitive with smaller startups that are hungry for business and willing to take on projects at reduced rates. Upfront, price tags are compelling to buyers, but in the end, quality of work and domain expertise is what is going to equate to value in any engagement.
Which area is likely to be affected more–ITO/BPO?
DL: Tough both ITO and BPO operations have the potential to be impacted negatively by the global debt crisis, ITO operations are at somewhat less risk. For example, many of Luxoft’s current engagements involve the development and maintenance of core IT applications, which are business–critical. Therefore, these specific development efforts are less at risk versus other business functions that may provide support to the organization, but are not critical to day–to–day operations. Additionally, during a time when companies need highly skilled development expertise, investments in ITO engagements are more justifiable, particularly for companies that need to keep pace with new technologies, such as mobile application and cloud computing development projects.