Has the offshore bubble finally burst?

August 26 2009

The Chartered Insurance Institute (CII) is warning that the offshoring of business services faces a difficult future; something that it anticipates will have a serious impact on the insurance industry.

The CII thinkpiece, Outsourcing: Continued prosperity despite the global economic crisis? written in partnership with The Royal Institute of International Affairs (Chatham House), concludes that the current recession has slowed the growth of the offshoring sector.

Laurence Baxter, head of policy & research at the CII says: "Offshoring providers have been a major beneficiary of the boom in business services since the mid 1990s, but now their outlook is less assured as they suffer amidst a downturn in the global economy."

Advanced economies are becoming more cost competitive, at least during the recession, reducing the incentive to offshore, not least because the attitude in the US and Europe has put Governments under increasing pressure to protect domestic jobs and industries. According to the Financial Times, since last July just 4000 UK jobs have been lost to offshoring.

Companies are refocusing attention on core and essential support activities as funding becomes more difficult, with new projects and innovation the casualty of cut backs in spending. Globally the TPI index - a measure of commercial contracts greater than $25 million - fell by 20 per cent in the first three months of 2009.

Of most relevance to the UK insurance sector is India, whose outsourcing industry is estimated to be worth $50 billion. In the five years from 2002 to 2007 India overtook Singapore and South Korea to become the fifth largest exporter of commercial services. In 2007 its offshoring sector grew by 35 per cent, but the growth has slowed with forecasts for 2009 estimated at to be 4 per cent to 7 per cent.

The CII thinkpiece predicts that the recession in outsourcing will impact on the insurance sector by bringing about:

• Financial pressure to cut costs, which will include cutting new offshore investment projects
  
• Sensitivity in political circles to avoid moving jobs offshore
  
• The reduction of non-essential outsourcing activities
  
• The creation of more home based or near-shore outsourcing alternatives
  

However it's not all bad news for the offshore suppliers. Vanessa Rossi, senior research fellow in International Economics at Chatham House, and one of the authors of the thinkpiece, says that once the global economy has begun to recover so will the outsourcing industry.

"Within a few years we expect that offshoring may well see a reversal in fortune. Although the upturn could take some time to emerge as the jobs market typically lags behind recovery in production and demand by at least two or three years."

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