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The recession and its effect on outsourcing software professionals is the main theme behind which this topic is being researched. The recession today has affected almost each and every business or organisational entity in this world by either one way or the other, being a graduate with an IT base and most importantly being graduated from India where most of the engineering students graduating have their mind completely focused on the software sector, and not surprisingly, it has made me dwell into the software field as well and hence into this topic, "THE IMPACT OF RECESSION ON OUTSOURCING SOFTWARE PROFESSIONALS WITHIN INDIA AND THE UK". To get into basic understandings of this research, it is vital to know about the recession, the reasons for a recession to occur, the credit crunch, outsourcing, the different types of outsourcing, body shopping, near shoring, The Indian and The UK software sectors. All these have been detailed with reference and understandings of academic writers who have valuable experience and knowledge of their corresponding literature, and also from the expertise of the professionals who were being interviewed.
The recession which is the most important aspect which influences this research is not a new thing to this world, it had influenced the world before and recently, there has not been a day in the past two to three years where a day has passed without the world giving out news regarding the falling or the depressed economy. News about unemployment being on the rise and the continuous downfall of the share market prices, some factories either reducing their production by a huge margin or closing down production due to low demand, profits of companies going down, and the most famous of them all in the recent years the fall of the housing sector. Recession has been the one word to sum them all in.
The current financial crisis of the world or the so called credit crunch has affected many countries across the world along with the recession. The United States of America being the world's largest economy and has strong trade and firm financial ties with most of the countries' economies around the world, hence most of the countries that have been victims of recession might be because of their financial bond with the US. This trend of recession that we are experiencing today in The UK and India might be because of The USA, but since the scenario in The US have been improving, things might look a lot more different in the days to come.
Stijn C. and Kose A.M. (2009) indicates to the academics in The National Bureau of Economic Research (NBER), which is a private research organization maintaining a huge database of the beginning and ending dates of The US recessions, define the recession as "a significant decline in economic activity that spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators". This is not the first time that the world economy has faced the R word, there have been 5 previous occurrences 1974, 1975, 1980, 1981 and 1990 (BBC). As defined by the NBER, the recession not only affects a government but the whole world on the whole, also affecting international trades between countries. Furthermore, they extend their definition simpler as "a recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough". By coming to an conclusion with these definitions, the committee concentrates on a complete set of measures-including not only The GDP, but also on employment, income, sales, and industrial production-to analyze the trends in economic activity, Stijn C. and Kose A.M. (2009).
The Reasons for a Recession to Occur:
Researching the origins or understanding the reasons for the occurrence of recessions have been interesting areas of research in economics. There are a lot of reasons for recessions to occur. Some might be associated with sharp changes in the prices of the raw materials used in producing goods and services, Stijn C. and Kose A.M. (2009). Furthermore, Stijn and Kose suggest that a country might trigger itself into recession by trying to reduce its own inflation, hence leading into efforts where it leads itself into to a decline in demand for goods and services, eventually resulting into a recession. Some recessions, including the current one which we have been facing for almost two years now is due to financial market problems. Sudden increases in asset values and an alarmingly quick growth on credit often coincides with hasty accumulation of debts. As corporations and the public get overextended and face difficulties in repaying their debt repayments, they naturally reduce investment and willingness to consume, which in turn leads to a decrease in economic activity. Most of the credit booms do not necessarily end up in recessions, but when they do, these recessions are often more costly than others, Stijn C. and Kose A.M. (2009). When people reduce consuming, it reflects directly on importing and exporting too, due to lesser demand for products and raw materials, and this directly influences on countries with exporting as major sources of income.
Since that there are various political reasons for recession to occur, it has always been a challenge to predict a recession. Furthermore, Stijn C. and Kose A.M. (2009) say that the behavioural characteristics of many economic variables-including credit volumes, asset values, and the unemployment rate-around recessions have been documented, but although they might be the cause of recessions, they could also be the result of recessions-or in economic parlance, endogenous to recessions. Stijn C. and Kose A.M. (2009) also argue that even though economists use a large set of variables to forecast the future behaviour of economic activity, none has proven a reliable predictor of whether a recession is going to take place. Changes in some variables-such as asset values, the unemployment rate, some interest values, and consumer confidence-appear to be useful in identifying recessions, but economists still fail to accurately forecast a significant fraction of recessions, let alone predicting their severity in terms of duration and amplitude, Stijn C. and Kose A.M. (2009).
The Three Ds
Most economists use some variations of the three Ds, to determine whether a recession has commenced or not. The three Ds being: duration, depth, and dispersion, Burns and Mitchell (1946). Duration is a clear determinant to measure recession. The longer an economy stays weak, the more likely it will be tagged as a recession. It can be simply understood with the two declining quarters of the economy for the duration test. But the years 1980 and 1920 were tagged as recessions because they did meet the depth test.
The third D being dispersion can be understood with the help of two real life examples in the recession of 1960 was caused due to the reason when the 118 day steel strike in 1959, the strike was not the direct reason for the occurrence of recession. But the failure of the economy to rebound after that strike ended was the ultimate reason for the economy to for the recession of 1960. Similarly the GM strike of 1970 was considered to be a part of the recession on that year.
The Credit Crunch:
The credit crunch is another word being used along with recession which has also caused major upset in the economy. Often being mentioned together, they are generally mistaken to be the same. But that not being the case and even though both being different terms, they both have had their influence in the same direction by affecting business and economy growth. The credit crunch is rather defined as an economic condition in which it suddenly becomes difficult and expensive to borrow money, lenders stop lending and credit becomes tough to obtain, (www.oxfordadvancedlearnersdictionary.com). The government actions to regulate inflation can be one of the reasons why credit crunch occurs. During a credit crunch, it is difficult to get loans and mortgages. It also affects job seekers as companies are not willing to recruit permanent employees. During such a situation, prudent employers start looking at the cost base and benefits expenditure during those times Keefe (2008); the situation for employees is not good during such times. Hence causing employees to think about ways to reduce cost and carry out business at lesser cost. It is at these times that in software companies, employees think about outsourcing.
During a credit crunch, there is an economic slowdown. This thus results in certain organisations freezing their off shoring and most of the time; companies don't get enough projects to work on. An example would be Yahoo, Internet Company as it informed its staff not to have any pay expectations Keefe (2008). But there are certain organisations that have been benefited from the credit crunch. One example is Nationwide which has been able to double its savings deposit in six months time in 2007, BBC News (2007).
It is not only the company and the organisation who are being affected by the recession and the credit crunch, the workers are also affected by the credit crunch and their behaviour changes during such times. Workers tend to be hardworking than any other time during credit crunch as they try to impress managers for job security. The importance is given to work -life benefits provided by the organisation based on the stats taken by Corporate Executive Board. The other factors that are considered important are the job security and communication to employees Keefe (2008). The communication would help the employees know what is happening and will motivate them during such times.
Certain organisations also see the credit crunch as an opportunity to increase commitment of employees towards the organisation Vorster (2008). Katie Roberts, engagement development manager for Boots revealed the importance of care to employees during a credit crunch. She viewed the credit crunch as an opportunity to listen to employees to genuinely send the message that the organisation is interested in its employees Vorster (2008). This can be used as an effective strategy by organisations and it creates scope for building employee relationships during a tough money market situation like the credit crunch.
Understanding that the recession and the credit crunch impose their effect directly or indirectly on companies or organisation naturally makes those companies or those organisations to try and minimise their damage in one way or the other. One of their basic ways will be to cut cost. And cost cutting in software companies generally directs them towards outsourcing projects or off shoring software professionals. These outsourcing with cost reduction in mind generally occur in hierarchy where companies in countries with higher currency exchange rate will look into countries with lower exchange rate, that is countries like The UK and The USA, relying on countries like India, Japan, China etc. This work is researched by taking software companies from The UK and India into account. Before discussing about The UK and The Indian software markets, outsourcing and the different types of outsourcing are detailed as follows.
In this global environment where companies exhibit their economic development in various degrees, outsourcing has become one among their basic strategies in developing and improving themselves in their filed. Outsourcing or off shoring is the joining or partnering of business with another company or person from a different country to do a particular function. Outsourcing is being further made easy and helped with the development of telecommunication, information technology. Off shoring organizations specialising themselves in developed sectors, Kavcic (2009). For most of the companies, outsourcing represents an initiative for them to spread their global network of ownership, their franchise, knowledge and technology in acquired organizations across the world.
Ola B. (2001) argues that "externalization or outsourcing of employment relations is not only a matter of temporary, administrative or geographical distance between employee and employer but a contemporary form of externalization responsibilities which results in the consequent understanding of human resource policies aiming at employability". Furthermore, companies tending to outsource their business are becoming the dominant mode of growth for firms seeking competitive advantage in an increasingly complex and global business economy Adler (1997). The most important reason for companies to outsource their employees is to reduce their cost of reduction and to improve their quality level of services.
Almost most of the organizations nowadays are outsourcing in one way or the other. The most common forms are information technology outsourcing (ITO) and business process outsourcing (BPO). Multi National Companies like IBM, Accenture and GE etc, are dominant outsourcing service providers in the information technology outsourcing and business process outsourcing fields. For instance, here in The UK, most of the mobile and broadband companies in communication sector like Virgin media, Orange, O2, 3 etc; have one of their support bases situated at India, mostly their system support base. Computer giants mentioned above like IBM, Accenture, Microsoft, Sun etc; all have a base BPO located at Bangalore, India.
The most important reason for companies to send their employees off shore to another country is to reduce their cost of reduction and to improve their quality level of services. In this global environment where companies exhibit various degrees of economic development, outsourcing has become their basic strategy in developing themselves. Outsourcing is being further made easy and helped with the development of telecommunication, information technology. Off shoring organizations specialising themselves in developed sectors, like the software sector have the opportunity to achieve increasingly more qualities and cheaper workforce, which can also possess professional qualifications and infrastructure which leads to a rapid increase in their activities, and above all to business success in an extremely competitive market Kavcic (2009). For most of the companies, outsourcing represents a starting point for spreading their global network of ownership, their franchise, knowledge and technology in acquired organizations across the world.
The aspect of off shoring provides the means to improve theoretical understanding of recent firm-level business strategy decisions and their outcomes Doh (2005), and the sector where off shoring or out sourcing has been practiced vitally is The Software and The IT sector.
Types of Outsourcing:
Arora et. al. (2001), suggests that there were three types of outsourcing that existed in India, they are those in their overseas offices, which is onsite consultancy or "body shopping", here the developers or programmers are sent off shore. The second type is where the project is sent offshore to the technology development centres, nearly all development work are done in India. And the third type of off shoring being a mixed case involved work on both onsite and in India. In the case of mixed cases an initial team specified the project inside the client firm with the bulk of development work to be followed in India. D'Costa (2002) says that outsourcing development centres often have long-term contracts with specific clients to carry out their successive projects, and those specific clients' work in isolated places in physically separate and secure locations.
The challenges of off shoring become especially acute when the work is being done in a different country (off shored), since that involves language, cultural and time zone differences. Ola B. (2001) argues that "externalization or outsourcing of employment relations is not only a matter of temporary, administrative or geographical distance between employee and employer but a contemporary form of externalization responsibilities which results in the consequent understanding of human resource policies aiming at employability."
Body shopping was one form of outsourcing. It was rather more of outsourcing than being a form of it. In the late 1990's, certain agencies in India started a kind of recruiting firm where they had tie ups with software companies in The UK and The USA, they would then provide these companies with cheaper labour in Indian professionals. Among the candidates who were interviewed for this research, two of them were off shored to The UK this way in the late 90's. With the dawning of the early 2000, the companies in The UK and The USA which were involved with such body shopping experience started approaching directly, either by setting up bases in India or setting ties with Indian Software companies. Academics like Xiang suggests that body shopping was an old concept just before the dawning of outsourcing or off shoring, Xiang (2007). Body sopping is slightly different from outsourcing. By body shopping, it is just purely recruiting employees and sends them to other countries. Whereas outsourcing is something where the project is obtained from abroad and the company carries out the entire work by itself in its own country. Body shopping is more like a contracted outsourcing. Body shopping doesn't require any big infrastructure. All you need is few employees and send them over to another country
The dawn of near shoring has been a huge threat for companies outsourcing or off shoring their projects to foreign countries. The kinds of projects with sever data security have been off shored or near shored to countries near them or their neighbouring countries. For instance projects that require serious data protection from The UK are sent off shore to countries near them in the EU or The European Union, Ranjith Kumar (interviewee).
The Indian Software and Information Technology Industry:
The Indian software sector is the main focus of this research, with India being a resource mine for leading software companies over the years, it is a great place to look into offshore projects for companies in developed countries like The UK and The USA. Importing and exporting of software projects and professionals from India and to India have been in regular chain for a long time now. Investment from companies like IBM and ICL initiated the Indian software and IT industry in India. Sumit et. al. (2007) suggests that exporting started with the then local companies like Tata Consultancy Services and Patni Computer Systems started exporting software abroad.
There were several reasons for India's booming in the IT industry. One of them being the educational emphasis on engineering, with its highly educated workforce, it favours India to respond to the global shortage of information technology talent Arora et. al., (2001, Chappell (2001) and Ramamurti (2001). Taking the Southern state of Tamil Nadu in India, there are approximately more than two hundred engineering colleges, from which an approximate number of twelve thousand computer science or IT engineers are graduated. Other than this there are graduates from other disciplines who do BSc in computer or IT and Masters in software. This is just the case of Tamil Nadu, which is only one of the Southern States in India which has nearly more than twenty five states. Also, the mode of communication English, which is much used in Indian schools and businesses, thereby providing the English market with English-speaking software developers there by making their mode of communication easier Kapur and Ramamurti (2001). India being a cheaper labour source to do business in than other developed countries. Wages for experienced developers are a fourth of those that is needed to be paid for human resource in the U.S. This study will be one of the first to evaluate an issue of the effect on the relationship between India and The UK regarding their software human outsourcing after the impact of recession on these two countries.
The UK and The Indian Software Sectors:
The software industry in India and The UK has stabilised their domain in their respective economies firmly in the past decade. The software industry is one among the few sectors that have been stable through the worldly recession crisis. Software companies in India and The UK have been outsourcing their employees or sending their employees off shores to companies in between them. This mode of inter relation among companies within these two countries have been vital and advantageous not only to the company, but also to their employees being off shored.
In conclusion, with much experience extracted from the interviewed candidates, information obtained from academic writers and with most of the data gained from journals and articles from The Economists, NBER, Financial Times and The BBC, this literature has been summed up with the following: the recession, the reasons for a recession to occur, the credit crunch, outsourcing, the different types of outsourcing, body shopping, near shoring, The Indian and The UK software sectors. Summing up to be the literature for this research topic. With the recession looming, it becomes clear for companies to cut cost, and outsourcing providing them with a very good mode of cutting cost. With evident literature provided, this research further extends into analysing the effect of recession on outsourcing software professionals within The UK and India.