Another important effect of the economic crisis in the offshore services industry has been the decline in attrition rates.<sup>4</sup> Attrition is one of the most pressing problems of the industry in India and it is also affecting the market in the Philippines. In the Philippines, a survey carried out in mid-2009 revealed that 79% of the offshore services providers had noted attrition rates as the “same”, “decreasing” or “decreasing significantly” (Philippine Daily Inquirer, 2009). During the crisis India saw a reduction in the attrition rates, to level similar to those of three years ago. According to a survey by IDC and Dataquest, India’s average IT sector attrition rate decreased from 18% to 15% in 2009 (Business Standard, 2010). For last quarter of 2008, the attrition rates for TCS, Wipro and Infosys were 11.9%, 11.9% and 11.8% respectively. Just one year earlier, the rate was 11.5%, 20.10% and 13.7% respectively for the three IT majors (AbhiSays.com, 2009). There was general consensus amongst senior management from the Indian offshore services providers that the highlight of the difficult 2008 crisis year was the decline in attrition rates. Alok Aggarwal, Chairman and Co-founder of Evalueserve, noted that “attrition in the offshore outsourcing industry came down significantly and Indian employees became more realistic about their expectations and about their careers. The current expectations will be able to provide a more sustainable, long term growth for the Indian offshore-outsourcing industry” (BPOWatch India, 2008).

Overall, the economic crisis has had varied effects on offshore services. Some clients have frozen contracts, while others have demanded additional services in order to reduce costs. Providers have responded to the changing demand by employing a number of different strategies to reduce their own costs, including lowering salaries, opening offices in cheaper locations and finding innovative solutions to enhance efficiency. As a result, even more activities are being moved to developing countries, both from developed nations to India, and also from India to other developing countries, due to labor arbitrage (substituting cheaper workers for more expensive ones) and the search for talent. The structural changes that facilitated the initial development of the offshore services industry have accelerated during the economic crisis and these changes will likely become entrenched in future years.

# **IV. Economic Crisis: Substitution Effect Versus Demand Effect**<sup>**5**</sup>

During this global economic crisis the offshore services industry has suffered two conflicting effects. The first is the substitution effect in which activities are relocated to cheaper locations leading to the growth in offshoring, while the demand effect refers to lowered demand due to the recession’s effect on the industry’s clients, resulting in a decline of offshoring services.

> 4 Attrition rates refer to labor turnover, which is the number of employees who leave the company in a given year.

> 5 As mentioned previously, the offshore services industry is a recent global phenomenon and has been evolving rapidly. There are no official data available at a global level. The economic crisis analysis in this section is based on country and company cases that support the main findings.

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