Infosys, India

Infosys’ business suffered following the political climate that has swept through the West, where some of their biggest clients are. Source: Shutterstock/drserg

Outsourcing firms in Philippines and India are struggling – and things are not looking up

OUTSOURCING IT firms have been the target of global ire in recent months due to an outpouring of vitriol from political animals looking for an easy target to blame for economic woes, and players in India and the Philippines have seen the obstacles in their way continue to mount.

The Philippines is home to a US$32 billion outsourcing empire, backed by a young and cheap population of workers who are largely fluent in English – the same qualities that put India on the map. It has driven its reputation as a source for talented, affordable technology skills. However, the shift in global sentiments towards immigration and overseas labor in general has caused the outsourcing industries in both countries to suffer.

Lawmakers in the Philippines are looking to get rid of preferential tax incentives that would hurt the bottom lines of outsourcing firms. Source: Reuters

Each country has their own problems. In the Philippines, government cuts, political strife and the looming shadow of China, who is also accelerating as a source for skilled labor, have contributed to a pile-up of problems. Advisory firm Tholons was reported by Bloomberg to have found China has been ranked ahead of the Southeast Asian country in terms of competitiveness, which will surely impact businesses’ abilities to win clients.

“We need to get our act together,” Rey Untal, head of the Philippine association of outsourcing companies, said in an interview with Bloomberg in Manila.

“The other countries know how big this IT business process outsourcing pie is globally and they want to increase their share. This is not a static world.”

SEE ALSO: Indian IT workers grit their teeth as US, Singapore tighten visa restrictions

The IT Business Process Association of the Philippines, a type of union for outsourcing firms, are aiming to make US$39 billion in revenue by 2022, which might prove to be difficult if firms are unable to collectivize enough to compete with international rivals and a government that is tightening its fiscal belt.

The industry will have to swallow higher costs if lawmakers succeed in passing a Bill aimed at removing preferential tax rates of executives in regional offices, impacting three outsourcing firms.

The political headwinds of the Brexit referendum and Trump’s election have thrown outsourcing firms’ plans into disarray. Source: Reuters

“It really is a significant wake-up call,” Untal told Bloomberg. “It’s good in a way. Sometimes, you need to be jolted. Many of the countries that compete with us directly are enhancing all the parameters that make them competitive – talent, infrastructure, incentives.”

India is facing similar issues, but their fate is closely knit with the speed-up of technologies and the problematic US President Donald Trump, whose criticisms of the global outsourcing market has hit the South Asian country particularly hard. Conservative policies put into place since the inauguration of Trump has scuppered outsourcers’ abilities to obtain visas for tech workers. India is Silicon Valley’s main source for IT talent, but proposed US legislation would make it harder for Indian workers to obtain H-1B visas.

SEE ALSO: Hong Kong: Li & Fung goes digital to save outsourcing business

“The proposed visa and immigration legislation… will raise the cost to operate by raising the cost of the Indian firms’ landed or onshore costs,” offshoring advisory Everest Group CEO Peter Bendor-Samuel, told Economic Times.

“Given the hyper-competitive pricing environment, it seems increasingly unlikely they will be able to pass along the cost to their clients, putting increased pressure on margins.”

Furthermore, Brexit has also had a significant impact on business, as local sentiment in Britain sharply rebuked the habit of local businesses of pushing work into cheaper, off-shore hands. Infosys, which has long been the king of India’s outsourcing industry, lost an important contract with the Royal Bank of Scotland shortly after the June referendum, reports the Economic Times.

But India’s problems aren’t just political: the outsourcing industry has been struggling for years, unable to cope with the frantic pace of technological change and a workforce that is largely untrained in many of the industries that need the most help.

The technology shift is cutting both ways: companies need fewer and fewer employees as they embrace the efficiency of automation and machine-led processes, thus negating the need for actual, fallible manpower. There are also not enough people trained in the necessary skills to survive the technological cull, resulting in an overall drop in hiring. As a result, established firms such as Infosys and Cognizant have cut their forecasts for the year and are expecting further flux down the line.

“As recent as two years ago, this talk of a transformation felt theoretical,” Cognizant executive vice-president Malcolm Frank says to ET.

SEE ALSO: India: Infosys pledges over 10k American hires amid pressure from US govt

“Today, talk of software platforms, automation and digital businesses is grabbing everyone’s eyeballs and, as we deal with this sharp transition, there will be a period of flux.”

What India and the Philippines are dealing with now is the inevitable result of changing global trade winds, beset by technology and leadership that is unable to cope with the transition stages. The slowdown of the outsourcing industry was always in the works, but the current political climate has managed to accelerate it.

Outsourcing firms, once a stalwart of the tech industry, are a bellwether for what will begin to affect other industries soon: difficult governmental policies, challenging human resource questions, and the ever-present possibility of rivals waiting to pounce. The Philippines and India have to begin preparing if they’re looking to stay in the game for the long run.