Transparency in Outsourcing, Part 2: Mum’s the Word

Part 1 of this two-part series looked at the reasons companies turn to outsourcing and offshoring. Part 2 will examine the laws governing the disclosure of layoffs and the state of the outsourcing market.

As the ongoing global economic crisis continues to impact the technology sector, many employees who once thought their jobs were secure are being given pink slips and shown the door.

Giants like Microsoft, IBM and Sun Microsystems have cut tens of thousands of jobs in just the first quarter of 2009, according to a recent report from Challenger, Gray and Christmas, a Chicago-based outplacement firm.

That is the highest number of quarterly layoffs recorded since the days of the Internet bust in 2002. The number of employee cuts rose 45 percent in 2008, according to the firm. The new numbers represent a 27 percent increase in cuts over the fourth quarter of 2008. Compared to the same period one year ago, job cuts have multiplied fivefold. More than 67,100 jobs were slashed by the end of February.

Companies attempting to alleviate the pressure on the bottom line have sometimes turned to outsourcing and offshoring — the process of outsourcing jobs overseas — to reduce payroll costs and other expenses such as health insurance, pensions, 401k matches, etc.

Not all layoffs, however, are actively publicized. To avoid the glare of the spotlight and a potential backlash, organizations sometimes let workers go quietly.

Recessions naturally benefit some businesses — liquidators, debt collectors and junk removers, for example, generally have their work cut out for them in times like these. What about outsourcers — are they raking in the bucks?

Layoffs and the Law

A federal law passed in 1989 — the Worker Adjustment and Retraining Notification (WARN) Act — governs how companies notify employees and publicly announce layoffs. At that time, an economic downturn was causing massive job losses, especially among blue-collar workers.

WARN mandates that a company of 100 or more full-time employees must provide at least 60 days’ notice to employees, unions and state and local governments if it plans to lay off a substantial number of workers.

“The law is written so that state and federal authorities are notified of job loss. State laws vary on a state-by-state basis,” James Harvey, partner and cochair of the global technology, outsourcing and privacy group at Hunton & Willams, told the E-Commerce Times.

However, companies with fewer than 100 employees are exempt. Instances in which the job cuts are the result of a natural disaster or due to a “faltering company” or “unforeseeable business circumstance” might also be exempt.

Also, notification need not be given when laying off smaller numbers of employees. If a company opts to cut fewer than 500 workers or less than a third of its workforce, disclosure is not required.

Mum’s the Word

Gauging exactly how well outsourcing companies are doing during the economic crisis is an inexact science at best. Many companies require the outsourcers with which they contract to stay quiet about the relationship. That leaves industry analysts little hard information to go on, save those few contracts that are publicly announced, according to Patrick O’Brien, senior analyst for outsourcing at Datamonitor.

“It’s not the outsourcing companies, but their clients that have always been extremely, extremely reticent about revealing the fact that they are using outsourcing. It’s a constant problem and a problem for the outsourcers as well. They’d like to be able to trumpet their successes and contract signings. But so often, their clients don’t want to because they want to keep that sort of thing quiet,” he told the E-Commerce Times.

“In fact, it’s always been that way. For companies’ own PR, outsourcing to foreign locations has never really played well to their actual customers, especially ones focused on consumer markets. I don’t think that is going to change,” said O’Brien.

Outsourcing, naturally, goes well beyond customer-facing call centers.

“So much of the jobs that are moving location are not simply people providing customer service but are things like IT administration, with techs in India updating an organization’s operating system remotely. Other positions that do not actually engage with a customer on a voice call, well, there is an awful lot of that going on. Things like finance and accounting are being done remotely, and that is under the radar of the average customer,” O’Brien said.

When Down Is Up and Up Is Down

For their part, outsourcers would prefer to portray themselves as strong and resilient to the economic factors hitting most other industries.

“What most of the outsourcing companies have been saying in their marketing is that in a downturn, there will be a high demand for their services and they will do well. I think a lot of that was being said at a time when companies didn’t realize just how deep this recession was going to be or how widespread it was going to be,” O’Brien explained.

Even if outsourcing is increasing in terms of the deals being signed, these companies still have the problem of wilting volume in existing contracts. For example, if customers are laying off loads of employees and their orders are down 20 to 30 percent, then the actual IT services or business processing outsourcing services they will require may come down at a similar level.

“There are two real problems and two things to analyze — signings versus what it does on the existing contracts,” O’Brien noted.

Outsourcing will not be as badly impacted as other segments of the market, according to O’Brien, who cited Datamonitor numbers from the past three months.

However, “the growth rate in outsourcing has declined,” Bill Martorelli, a Forrester Research analyst, told the E-Commerce Times.

The drop is in some ways expected and in others a surprise, according to Martorelli.

“This economic situation that has been around a while now has the effect of slowing down decision making. So even though you would argue that outsourcing revenues would logically grow, the fact of the matter is that sometimes it just puts the kibosh on decision making for a time until people can see their way clear of the turmoil,” he explained.

Some outsourcing decisions — a lot of the offshoring for example — are done for discretionary new projects. These providers get a lot of the systems development work in addition to taking on what could be described as outsourcing.

“Some of the project work that’s more discretionary in nature suffers,” Martorelli said.

Timing also plays a factor, as do international currency markets. “For a while, the dollar was weakening and the Indian rupee was strengthening. Since then, the dollar has gotten a lot stronger and the rupee has been relatively weaker. Currency effects do tend to play havoc with these companies,” Martorelli noted.

It’s 2002 All Over Again

It’s often a financial see-saw: A company looking to cut costs may give outsourcers more business, but that company may also cut IT spending in general.

“One increases IT spending, and the other decreases it. That affects what happens,” said Ross Tivnosky, vice president of research at the Everest Research Institute.

For example, in 2000, application development growth nosedived, so the growth in outsourcing application development similarly dropped. IT consulting as a business ventured into negative territory, Tivnosky told the E-Commerce Times.

Even as business leaders may wish to invest in research and development through a downswing in anticipation of the subsequent upturn, as a recession deepens, many organizations are compelled to ax development as well as consulting.

The IT industry is particularly hard hit because companies rarely increase their IT spending and will begin making their cuts there.

“Companies thinking about installing a new software system might postpone it until after the recession. For outsourcing companies, that’s mixed news,” Tisnovsky noted.

Transparency in Outsourcing, Part 1: Silent Shrinkage

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