November/December 2009 / Cover Story
Outsourcing in a Troubled Market
The authors outline the nature and history of outsourcing and discuss how the economic downturn has affected it. Outsourcing transactions have been a common feature of the market for about two decades, but as credit markets have deteriorated, many companies have been forced to delay new outsourcing projects or restructure existing ones. Meanwhile, the trustworthiness of some service providers from India has come under scrutiny, as one of the largest, Satyam Computer Services, Ltd., was hit by revelations of financial fraud. Wipro Technologies, another large Indian IT outsourcing company, also came under fire.
During debate surrounding the use of federal bailout funds, several in Congress sought to impose offshore outsourcing restrictions on companies that receive help. Restrictions were left out of the final bill, but regulation remains possible.
Despite the pressures, the trend toward outsourcing is predicted to continue. Most outsourcing projects today are focused on managing customers’ existing operations at a lower price, rather than improving processes and technology. Broader termination rights and increased risk-sharing are trends that appear to be driven by the down economy. The authors suggest asking for a letter of credit or a guarantee from a parent company as part of any outsourcing deal, especially if the service provider appears weak financially.
