An economic downturn in the US would benefit Indian IT outsourcing companies, according to the CEO of the one of the industry leaders, Wipro.

The strength of the rupee against the dollar has so far had a negative impact on the Indian IT services industry, because the value of contracts with US companies is gradually diminishing. This has adversely impacted the share prices of many Indian outsourcers, despite the phenomenal revenue growth rates they still enjoy.

However, Wipro CEO Azim Premji believes that the recession that many financial observers are now predicting would put US companies under increasing pressure to cut costs – and so lead them to outsource more.

"Whenever the world is facing cost pressures or facing a little lower demand, then US companies will face the need to take out costs," said Premji. "So the contrarian situation is that they could outsource more and that would benefit the [Indian IT services] industry."

Meanwhile, software-as-a-service providers could be among the first companies to feel the effects of a US downturn, according to technology analysts MGI Research.

What makes SaaS contracts popular with user organisations – that they pay only for what they consume – also means that providers are very sensitive to the economic conditions of their customers.

“SaaS companies may take a triple hit as they will see their initial transaction sizes trimmed, upsell opportunities reduced or eliminated, and then there is a possibility that users will aim to reduce the number of subscribed seats,” MGI Research analysts wrote.

The analysts expect that those early SaaS vendors that were launched during the post dot-com crash are more likely to whether the downturn than those set in the past three years, who have so far only been used to favourable conditions.

Investment banks including Morgan Stanley and Merrill Lynch have warned that a recession in the US economy is imminent, triggered in part by the recent collapse of the sub-prime mortgage lending industry.

Further reading

Cisco spooks Wall Street with 'credit-crunch' caution

Currency commotion The escalating value of the rupee is beginning to damage the Indian IT services industry's revenues.

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