Project Management Institute

After the Fall

The Economic Crisis Started in the United States, But It May End Up Affecting Projects around the World

BY JOHN BUCHANAN

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Conventional wisdom dictates that as the U.S. economy goes, so goes the rest of the world—that the fiscal fabric of a global marketplace is inextricably stitched to the fate of the United States. These days, it's more than just a lofty theory. As the United States teeters on the verge of its worst economic crisis since the Great Depression, it's up to project leaders around the world to find ways to adjust to massive volatility brought on by the downturn.

The International Monetary Fund predicts a 2009 global growth rate of 3 percent, down from 3.9 percent in 2008. In the United States, the drop-off is even steeper. The group predicts a 2009 growth rate of 0.1 percent compared to a 2008 figure of 1.6 percent.

The effects of the decline in the United States are obvious—projects may get downsized or cancelled as the economy retrenches. But questions linger over how the superpower's slump will change the outlook for projects elsewhere. The short-term prognosis suggests it's reasonable to expect some collateral damage to projects in just about every corner of the world.

Even high-flying economies in Latin America and Asia Pacific may see a downturn—especially those that rely on mega-projects outsourced from the United States. Many of these nations are developing strong economies of their own, but they are still not immune to external factors.

“Many global IT providers have developed offshore facilities in India and Latin America to deliver services to clients in the United States and Europe as a way to reduce costs,” says Marcelo Kawanami, a São Paulo, Brazil-based industry manager at U.S. research and consulting firm Frost & Sullivan. “The crisis in the United States might impact IT service providers in the sense that many IT projects will be postponed as companies become afraid of making long-term investments.”

Latin America is fast emerging as a major player on the global project management scene. But the region's close ties to the United States may spell trouble, at least in the short term.

“There is a very strong relationship between economic well-being in the United States and growth and prosperity in Latin America, especially for countries close to the United States, such as in Central America,” says Peter Hakim, president of Washington, D.C., USA-based Inter-American Dialogue, which tracks economic issues and relations between the United States and Latin America.

“When the United States gets the sniffles, Mexico gets pneumonia,” he says. “The same is true to a lesser extent for other countries in Central America.”

Mr. Hakim predicts the economic crisis in the United States will temporarily put the brakes on the flow of projects, investments, remittances—all capital—to Latin America.

Companies will curtail their budgets and adopt a wait-and-watch mode.

MANOJ MOHTA, CRISIL RESEARCH, MUMBAI, INDIA

Although the economic crisis will certainly test the staying power of Latin America's prowess, not everyone is buying into the doom-and-gloom scenario. Since the enactment of the Central America Free Trade Agreement, Latin America has positioned itself as “the new Asia,” touting benefits such as its proximity and similar time zones to customers in North America. As a result, major U.S. companies such as Dell, IBM and Procter & Gamble have shipped off a variety of IT projects down south. And business has boomed.

New Horizons

As some of the more traditional strongholds for project action struggle, emerging regions in the Middle East and Africa may benefit.

“Particularly from a natural resources perspective, Africa has tremendous potential as a market for projects,” says Esteban Herrera, president and CEO of NovaSphere Group, a management consulting firm in Dallas, Texas, USA.

China has already made massive capital investments in the continent, he says, and “you're going to continue to see the big oil and gas companies invest in Africa.”

And that, in turn, could create a companion market for support projects in areas such as infrastructure, IT and telecom.

Current hot spots include Nigeria and Kenya. And Egypt is also looking to stake its claim on the project field, particularly in outsourcing.

“The Egyptian government has taken a very serious and pragmatic view on bringing service jobs into the country, so they are offering significant incentives,” says Mr. Herrera. “They are also investing in education.”

The country is witnessing an unprecedented boom in business process outsourcing projects from Persian Gulf countries such the United Arab Emirates, whose oil-based wealth is largely immune to the U.S. crisis.

“Those Gulf economies like Dubai are very well-diversified,” Mr. Herrera says. “So, although little of it may be from Western countries such as the United States, I think you're going to see very significant growth in project outsourcing.”

Argentina, for example, has focused on the development of an IT services sector and gone to great lengths to build a foundation designed to withstand short-term shocks. In 2002, the country engineered a currency devaluation that made it exceptionally competitive. Two years later, it crafted legislation that promoted its software industry by offering big tax breaks to industry-related companies. The initiative helped attract a long list of major U.S. firms such as Microsoft, HP and Oracle. As a result, the IT industry has grown at more than twice the rate of the nation's overall economy.

A prime example of Argentina's success is Buenos Aires-based Globant, a Latin American leader in software development and IT infrastructure management. Leonardo Garrigó, program manager at the five-year old enterprise, oversees 45 project managers responsible for 120 active projects. Of those, 68 percent of revenues originated in the United States.

Mr. Garrigó agrees the flow of discretionary and non-strategic projects from the United States to Latin America will be negatively impacted by the economic crisis. But he predicts top-tier service providers—and he includes Globant among them—will not be affected.

“We are engaged in high-value strategic projects,” he says, “and those do not suffer the impact of economic conditions like less critical projects do.”

Some Latin American nations, such as Brazil, may offset U.S. weakness with the strength of their own economies. Along with IT services, Brazil is a booming market for infrastructure and real estate projects that are based on its own economic growth, says Alexandre Chequer, a São Paulo-based partner affiliated with U.S.-based law firm Thompson & Knight. The sophistication and maturity of Brazil's service providers make the country largely immune to volatility in the United States, he says.

“There will not be much impact, because Brazil is now a kind of safe harbor for U.S. companies. Things may not be going well in the United States, but in Brazil, things are going great,” Mr. Chequer says. “The economy grew about six percent in the last trimester because projects need Brazil and Brazil needs projects. I don't think, for example, that companies that are investing in real estate projects, such as resorts in northeastern Brazil, will stop those projects because of what is happening in the United States—they need new markets to develop outside of the United States.”

Mr. Chequer expects project activity to actually increase in Brazil based on the teeming demand for oil and gas facilities, shopping malls, condominiums and IT services.

When the United States gets the sniffles, Mexico gets pneumonia. The same is true to a lesser extent for other countries in Central America.

PETER HAKIM, INTER-AMERICAN DIALOGUE, WASHINGTON, D.C., USA

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“Brazil is a market that has needs,” he says. “That means opportunity.”

Brazil must find a way to keep up with that growth, though—including finding a way to contend with the talent crunch. “For example,” Mr. Chequer says, “as result of demand, it is now very hard to find top engineers.”

Wait and Watch

Much like Latin America, emerging markets in Asia Pacific have been booming with projects. Yet this region, too, relies heavily on projects shipped over from the United States.

Despite its status as the global leader in attracting outsourced IT projects, India, in particular, faces near-term consequences from the economic meltdown in the United States, which ranks as its biggest market.

“The turmoil in the United States is expected to increase the length of time required for making outsourcing decisions, resulting in longer sales cycles that will impact revenue growth,” says Manoj Mohta, head of research at CRISIL Research, Mumbai, India. “Discretionary IT spending, which typically accounts for around 10 percent to 15 percent of IT expenditures, is expected to be curtailed due to the uncertain environment. Companies will curtail their budgets and adopt a wait-and-watch mode.”

Data for fiscal year 2008 showed revenues from Indian IT projects totaled US$23.9 billion and business process outsourcing totaled US$10.9 billion. Of that, 61.4 percent came from the United States, according to NASSCOM, the Indian IT industry trade body. But after years of massive growth, those numbers may be in for a reality check.

“Indian IT providers are already facing pressure on renewals, which are being contracted at lower billing rates,” he says. CRISIL Research, which had projected an already moderate growth rate of 21.3 percent and 19.7 percent for 2009 and 2010 in its annual review dated May 2008, has further reduced its growth rate projections to 17.1 percent and 16.2 percent, respectively.

Spread It Around

The upside to all the economic upheaval is that it's prompting organizations to pay more attention to risk. The warning is clear, says Esteban Herrera, NovaSphere Group.

“If you're a Fortune 500 company and you have 50,000 employees in the United States, 5,000 in India and 500 in the rest of the world, you have a problem,” he says. “The lesson here is that organizations need a well balanced portfolio of talent locations, so if there is economic turmoil in one region, your entire business is not subject to that region's risk factors.”

The crisis could spark consolidation, “with the weaker players either agreeing to be acquired or shutting down,” Mr. Mohta says. “In addition, the industry will slow the pace of hiring until it can get clarity on its future pipeline for projects.”

A cascading effect will be a reduction of wage inflation from 14 percent to 16 percent over the past few years to eight percent to 10 percent, at least in the near term, CRISIL projects. That's bad news for workers, but a reduction of labor-cost increases will ultimately make India more competitive with emerging rivals such as Latin America.

And there's no doubt India will continue to be a dominant force, says Mr. Mohta.

“Indian IT sourcing is still a strong growth story, despite any temporal break in the growth,” he says, noting the CRISIL prediction that the country's IT services market should grow at a five-year annual compound growth rate of 18 percent to 20 percent.

Like Brazil, India boasts a dynamic economy that can help it weather the IT outsourcing storm. And as in neighboring China, serious cash is being invested in a bevy of projects aimed at creating and upgrading the infrastructure. China and India also happen to be home to the two biggest emerging consumer markets in the world. And that's prompting a flood of projects, including some from the United States.

U.S. pharmaceutical manufacturing giant Schering-Plough, for example, may be looking to shift some its project portfolio away from its home base.

“Companies like Schering-Plough are dependent on the U.S. economy to drive sales and the bottom line, and therefore to generate cash for research and development and to allow us to develop a lot of projects,” says David Nicholson, Ph.D., senior vice president, global project management and drug safety.

“If the United States isn't going to do that, either we'll stop discovering and developing new medicines, or we have to look for external markets globally to generate those revenues,” he explains. “So today, companies like Schering-Plough are paying more attention to places like India.”

Dr. Nicholson says that moving into other markets also helps mitigate the risks inherent in the typical $1 billion required for a new drug project by amortizing the capital investment over a broader market base.

It's a lesson in risk management all the more relevant in today's turbulent times. The economic crisis may have started in the United States, but its effects are reverberating—to varying degree—across the world. Yet as emerging markets become more self-sufficient, project leaders will find even greater opportunities. The result will be a diversified, and ultimately healthier, economic project landscape. img

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Leadership 2009 www.pmi.org
Leadership 2009

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