The current U.S. economic slowdown will lead buyers of IT services to consider increasing the percentage of their labor in offshore, lower cost locations, according to a recently published report by the market research firm Gartner.

The research indicates that with concerns that the U.S. economic slowdown could extend to other geographies, organizations are refocusing on IT cost reduction and taking steps to accelerate the use of offshore labor. As a result, Gartner believes that buyers of IT services will shift from cost containment goals to a greater focus on cost reduction and productivity increases in their sourcing decisions.

Gartner sees two possible scenarios that will have an impact on offshore services adoption in the coming months: temporary economic downturn (best case scenario) or a more sustained recession (worst case scenario), according to Gartner vice president Allie Young.

In the best case scenario, buyers will aggressively seek cost saving measures by accelerating offshore delivery or, for first time users, moving IT services to offshore locations. For buyers that havent used offshore before, this will be a critical step to changing their paradigm for services sourcing toward a global delivery model approach in the future.

In this case, first time buyers of offshore services will seek providers that can prove effective in transition and project management skills, that can demonstrate added value from previous clients, and are candid on the real costs of moving offshore. Buyers will demand greater clarity on costs, and they will seek immediate savings.

In the worst case scenario a more sustained economic slowdown leads to a prolonged recession in the U.S. and possibly other global economies Gartner expects a more aggressive movement to cut IT budgets. In this case, buyers will aggressively move toward offshore destinations and service providers that can offer a global delivery model to access lower cost IT labor for routine IT work that must continue for the business to operate.

In this case, non-critical projects may be delayed indefinitely, and for most organizations, any discretionary IT spending will be cancelled. Some variation by vertical markets will occur, but most will experience the overall economic recession in some form, and IT will typically be impacted by budget cuts of some form. The mix of offshore work will emphasize routine maintenance and development work vs. higher value service contracts, and providers will need to work closely with clients to deliver cost savings.

In either case, software sales will naturally gravitate away from the United States and toward the organization providing the outsourcing. Gartner believes that much of this outsourcing will take place in India. While the recent appreciation of the Indian rupee and rising wage rates have made some of the long held benefits of Indias offshore services cost competitiveness less predictable, the more sophisticated providers have made critical process investments, thus minimizing the impact of wage increases alone in their final price of services to buyers.

This is not to say that software sales are going to immediately dry up in the United States, according to Gartner senior researcher Arup Roy. In most sectors, the watchword is caution IT budgets have not yet been cut, and offshore services options are being considered or accelerated as a prudent step to contain labor costs.