News last Friday that the economy shrank for the first time in 16 years looks set to make the grim prospect of a recession inescapable. How will this impact on the offshoring industry - a business practice that was beginning to take off the last time Britain was in a recession? This question is, in part, answered today by a new report launched by Intellect, which identifies potential trends in offshoring that the UK is likely to see over the next half decade.

The report, based on a survey of industry experts, found that despite political opposition to global sourcing, many believe that the economic downturn will increase demand for offshoring. These findings are echoed by the Everest Research Institute, which predicts that Business Process Offshoring (BPO)  from the financial services sector will increase, in an effort to minimise costs.  Intellect's report also draws attention to the changing nature of the industry: as offshoring increases, both in terms of the types of processes being offshored and the number of business turning to offshoring to cut costs, there is evidence that providers will consolidate into fewer but larger companies, which will continue to grow their offerings.

One thing to remember, however, is that some influential factors are still to be determined: perhaps one of the biggest impacts on the future of offshoring will become clearer next Tuesday - US election day. If Senator Obama is elected US President, he is likely to enact his pledge to discourage the offshoring of jobs. However, while this could spell more uncertainty for the sector, Intellect's research has also found that offshoring is now very much seen as a standard business practice. What remains to be seen is whether external factors such as the recession and US presidency are enough to reverse this trend.

By Scarlett Graham, Programme Executive

When was the last time you read a good news story about offshoring? I’m guessing perhaps ‘not for a while’ might be typical answer. However, a recently published study of more than 66,000 firms over a nine-year period has produced a series of interesting results, which challenge the often negative preconceptions of what is now an accepted business process.

The report, produced by the Globalisation and Economic Policy Centre based at Nottingham University, found that offshoring results in increased turnover, improved productivity, more exports and higher employment. This certainly runs contrary to some of the critical perceptions of the industry. Furthermore, the research found that the UK is not offshoring jobs largely to 'cheap labour markets'; rather the most frequent locations are other OECD countries and, interestingly, only 4.5% of multinationals surveyed have an offshore presence in India or China.

So what does this mean? And why does it matter? Well, in a time of economic difficulty firms may increasingly look to offshore parts of their businesses. This will inevitably and understandably generate both media and public interest, particularly as offshoring does lead to increased job turnover (acknowledged in the report). However, what is not widely publicised is that offshoring is a minority contributor to this process and, will, in fact, produce more job gains rather than losses. So if businesses look to protect themselves in these difficult economic times by going down the offshoring route, and the critical headlines appear, just remember the benefits for the UK vastly outweigh the disadvantages.

By Ben Andersen-Tuffnell, Transformational Business Programme Manager 

We and our colleagues from the Intellect-Nasscom Partnership Programme delegation returned to the UK last week hugely impressed with the health of the Indian emerging IT sector and excited about the partnering opportunities available. The week-long mission was kindly sponsored by the South East Media Network, UK Trade and Invest and the UK India Business Council and was the first initiative in a partnership programme which aims to increase trade between the UK and India.

The UK delegation of nine was lead by Tom Wills-Sandford of Intellect.  Other participants were Arjun Chatterji (Playmetv), Gina Fegan  (South East Media Network ), John Gavin (G4h), Keith Dewar (SBA ), Nigel Hartnell (FFastfill and also Chairman SEMN), Phil Rice (Erudine),  Richard Sykes, and Steve Roche (Xenzone).

The kind of partnership opportunities explored by the UK delegation included:   

• Outsourcing of software/web development and IT services   
• Business and knowledge and process outsourcing   
• Strategic consulting   
• Selling into the Indian market   
• Assistance with UK market entry (for example, sales/marketing execution and resourcing)

A significant degree of momentum was generated during the week with, for example, a number of follow-up meetings scheduled to take place in London in the coming weeks in order to continue the discussion started in India. Some members of the UK delegation even said they were planning or making significant changes to their business plans to maximise the opportunities they identified during the week. Additionally, the UK companies identified synergies and ways that they could partner and do business together.

One of the most striking things we found was an acceptance in India that the cost advantage, compared to the US and UK (its two biggest customers) will erode, as wage inflation in the local IT industry is running at about 15 per cent per annum. 

Many Indian IT leaders believe  they have already reached the position where their competitive advantage comes not just from lower costs, but from their huge and skilled workforce and the quality of the services that they deliver. 

We heard many times about the paramount importance of quality. Even with their large talent pool, wage inflation is high because there is still a shortage of skilled workers. This leads in turn to high staff turnover - the industry average is 19 per cent per annum for the IT sector and much higher for the IT-enabled services sector. This a major concern for the industry. We heard a lot about the measures individual companies were taking to reduce staff turnover, but the effectiveness of the measures appeared to be limited.

The mission team concluded that if you are in IT and you have not at least explored how India and its vast array of IT services (as well as its growing domestic market) can help you grow your business or reduce your costs or get access to scarce skills, you will be putting your organisation at a serious disadvantage.

A successful partnership will bring benefits to both sides - not least to UK small and medium-sized enterprises (SMEs). It is for this reason that Intellect expects to continue with this programme linking SMEs from both countries. We are planning a return visit with Indian IT companies visiting the UK for a week in late spring and expect to create a forum to exchange experiences and learnings. We also expect to return to India with other SMEs in 2009 and beyond.

By Tom Wills-Sandford (Intellect) and Steve Roche (Xenzone and Intellect member)

Amidst the furore over Channel 4's Big Brother 'racism row', Tom Wills-Sandford, deputy director general of Intellect represented the UK technology industry on a UK Trade and Investment-sponsored mission to India, led by Secretary of State for Trade and Industry Alistair Darling and supported by Chancellor of the Exchequer Gordon Brown. 

While dodging questions about Jade Goody and the role of reality TV in Britain, five key areas of Indian IT that the UK cannot afford to ignore emerged, as Tom writes here:

Indian IT steps up a gear

Many of the people I met are international IT leaders who have moved to India to be involved in its IT industry. For example the head of marketing for a large IT outsourcer is a US citizen with a PhD from Berkeley, who until recently worked for Bain & Co in the US. Many highly skilled overseas-based Indians are returning to India and some non- Asians are attracted by the fantastic opportunities. Even the head chef at the Infosys Bangalore campus is French! Non-resident Indians are bringing Western approaches to social networking, business management and, of course, remuneration to India. Innovation is now coming from their networks, coupled with local institutes of technology.  India is firmly at the leading edge of global economy.

‘India is IT’

The IT industry in the UK often asks itself ‘Is India a threat or an opportunity?’  That really is the wrong question.  Seeing the size of facilities that companies like LogicaCMG or Xansa have Bangalore and Chennai hammered home the huge scale of IT-enabled services in India.  The strap line for Nasscom -The Indian IT trade association - is ‘India is IT’. We cannot afford to delude ourselves that techno-nationalism is the answer. It must be seen as an opportunity for the UK IT industry or we will fail. 

Wading in to the skills mire

However, the Indian IT sector does have its issues, foremost of which are the triumvirate of skills, recruitment and retention.  The Indian industry takes the skills issue very seriously and is addressing the problem aggressively – possibly more so than we are.  For instance they have ‘finishing schools’ to reduce the time graduates take to become productive, they recruit students part way through their courses and they appear to work very closely with local colleges to shape the courses. Maybe it is time for us to take a leaf out of India’s book.

Value not cost

Inflation in India is running at six per cent per annum and IT wage inflation is nearly 15 per cent.  Annual employee attrition is around 13 per cent. It does not take a genius to work out that if these trends continue Indian IT will become uncompetitive on cost. The industry is well aware of this and is now beginning to push ‘value not cost’. As this removes one of our differentiators it seems more important than ever before that we work together with India and not against it.

Take your partner by the hand

Out of a population of 1.1 billion there are one million people employed in the IT-enabled services sector in India. Whether or not ‘India is IT’ is debatable, but it is a huge and enormously influential force that can help us grow our economy if we partner with it in the right way. For its part, India’s approach is one of interdependency on the West. Therefore we both need to collaborate to make the most of our technology industries.

As a result of this trip Intellect and Nasscom are planning to work together in several ways. One early initiative will be to link up small businesses in both countries with common interests to ensure that the opportunities are not just there for the large companies, but are available to all. It is partnerships like this that will help our respective industries and economies and will transform the sector into a more formidable force in the global economy.