Outsourcing fails to deliver cost savings

Shares in Indian outsourcers have plummeted as a consequence of the financial instability

A study carried out with 47 UK IT directors has revealed that six per cent of organisations plan to bring offshored IT work back to the UK over the next 12 months.

The results reflect changes in the motivation for offshoring as wage inflation in overseas IT centres erodes the cost savings, while quality control and data security concerns become more prominent, according to the study carried out by ReThink Recruitment.

"IT directors increasingly accept that the UK has other competitive advantages which offshore destinations do not possess," the report said.

"For example, it is usually much easier to resolve disputes with outsourced suppliers in the UK than in emerging markets where legal systems can be far less effective."

The news on Merrill Lynch's takeover and Lehman Brothers' bankruptcy has sparked uncertainty over the future of the companies' outsourcing providers, and caused Indian shares to plummet amid concerns about the instability of the global financial system.

Lehman Brothers has dramatically reduced its outsourcing in the past couple of years and ceased one of its main outsourcing deals for IT helpdesk with Indian services giant Wipro due to poor quality of service in 2003.

Earlier this summer, it also emerged that the bank was to shed about 180 of its 700-strong workforce at its captive back-office unit in Mumbai.

At the time, it was widely speculated that Lehman's top management partly blamed the $2.8bn net loss reported in its second trading quarter on data processing work done in India, and said that this would have an impact on the future of its Mumbai unit.

But the bank still has dealings with outsourcers Wipro and Tata Consultancy Services (TCS). The former said that the bank is not such a relevant client and that it is not worried, while TCS reckons that it may not suffer much of an impact.

Lehman said that it would file motions on Monday to allow it to operate and pay its staff during the strategic restructuring, which includes the sale of its broker and investment management units. It is not yet known what the precise impact will be for Lehman's in-house IT staff.

Also in the financial services space, Merrill Lynch (recently acquired by the Bank of America) has some noteworthy arrangements with Satyam and TCS.

However, Tata and Infosys already have an existing relationship with Merrill Lynch's new parent and therefore a significant advantage.

In the meantime, Satyam saw its shares plunge by 9.45 per cent today (Monday), while its peers Infosys and Wipro both lost more than four per cent.

Even if outsourcers are trying to play down fears of the impact caused by recent events in the financial world, the blow is inevitable for vendors active in that sector.

"Financial services, and investment banking in particular, has been a strong and early supporter of outsourcing," said Mark Kobayashi-Hillary, director of the National Outsourcing Association.

"These companies are often the first to investigate new and better ways of getting a project done and so many of the IT suppliers are quite dependent on the banks."

Kobayashi-Hillary is predicting a tough time ahead for any IT suppliers that depend heavily on a strong banking market.

"If the giants of Wall Street are in trouble it could be more of a tsunami than a ripple effect for the IT companies that support the banks," he said.