In recent years, many Western European companies have outsourced IT services to service providers which are either based, or have substantial parts of their operations based, in offshore locations – predominantly in India, Vietnam and other parts of Asia but recently also to some extent in South America – as well as nearshore locations in Eastern Europe, such as Poland, Lithuania and Ukraine. Access to large, highly qualified resource pools in these offshore and nearshore locations has generally led to significant cost reductions and high-quality services for customers. At large, the move to offshore and nearshore locations has been a success.
Service Providers face various difficulties during COVID-19
Recent developments in the COVID-19 pandemic have included restrictions imposed by the governments of most countries such as complete lockdowns or at the least some restriction on the ability to carry on business in the ordinary course (for example, restrictions on which businesses can be open and on the maximum number of people permitted to gather in places such as normal business premises). This has caused various difficulties for the IT service providers which can negatively affect their customers in the form of late delivery, non-compliance with SLAs and an increased risk of data breaches. The issues are mainly related to:
In India, where the nationwide lockdown took effect at very short notice, not all service providers could properly adjust to the new circumstances, especially if their contingency plans were not sufficiently robust. This has resulted in difficulties for employees working from home, simply because of the lack of sufficient IT-infrastructure in the residential areas – for some, working from home has been almost impossible. Even where the infrastructure is in place, consultants may have difficulty maintaining proper traction. In Argentina for example, the general complications of COVID-19 and the subsequent government restrictions are expected to cause difficulties in performance, as the restrictions may require changes to the possibilities to perform the services, and consequently sticking to timelines are almost inevitable and will necessitate contract re-negotiations.
In Eastern Europe, the requirement to work from home has also posed concerns. Unlike parts of India, the bandwidth of the infrastructure has generally been able to cope with the large number of people working remotely with only minor hick-ups. In Ukraine, the issues mainly pertain to the risk of cyber security threats, especially if the remote workstations cannot maintain the same data security standards (e.g. if they are not using secure communication lines). This introduces greater risks for those companies which have granted their service provider access to sensitive or personal data. Poland has faced similar issues however to a lesser extent, as companies are only encouraged, but not required, to have their employees working from home. However, the closure of schools/day-care centres has meant that some service providers are facing issues in maintaining enough resources on-call, as many employees take leave in order to care for their children.
The physical and practical restraints are not the only issues faced by the IT service providers. The general uncertainty in the global economy also impacts on the market and the risk of companies becoming financially distressed or even going bankrupt is no different in this market. Argentinian companies may not lay-off staff due to the COVID-19 lockdown, but will have to pay salaries at least until 1 June, which may result in cashflow issues if the amount of work declines. Additionally, some Indian service providers are hesitant when it comes to entering into new projects simply because of the uncertainty of being able to deliver in a timely manner. The pricing of Ukrainian companies is expected to go down and may become more competitive in the global marketplace. Despite many governments implementing support schemes to keep businesses alive, access to such schemes may not be available to the service providers, in Poland for example such support schemes are only available to companies paying taxes in Poland or whose beneficiary owners are Polish tax residents – outsourcing businesses that have beneficiary owners outside Poland or do not settle taxes in Poland would miss out on the government aid.
How to mitigate the risks of a non-performing service provider
The issues faced by the service providers will likely – at least to some extent – have an impact on their customers’ businesses. Even though such impact may vastly differ between customers depending on the specific services, the provider and location in question, all companies outsourcing IT should prepare themselves and take steps in order to mitigate any potential negative impact on their nearshore and offshore arrangements as a result of COVID-19. All companies outsourcing IT should consider taking the following steps:
This article has been prepared in collaboration with: