Offshore outsourcing: Business boon or bust?

Proponents defend offshore outsourcing as a low-cost method to offload some IT-related tasks, but the risk of staff backlash looms large.

A manufacturer needs to upgrade its engineering and design capabilities to remain competitive. The network staff, already bare bones, doesn’t have the time to do the upgrade, but IT can’t afford to hire full-timers for the job. This is a familiar scenario these days as companies jockey to get ahead in a global economy struggling to recover from the post-bubble slump. One solution that’s increasingly gaining converts is offshore outsourcing.

Offshore outsourcing is not only less expensive – as much as 75% less – but also faster and better, some experts say. But, they admit that not everyone is thrilled by the prospect of sending jobs out of the country. “I don’t think there is a more divisive and partisan issue in the IT community right now than offshore,” says Steve Sanazaro, a Dallas IT leadership partner with Tatum CIO Partners.

The conflict is a throwback to 1970s protests over buying Japanese cars, says Glenn O’Donnell, a program director for Meta Group. “A similar thing is now happening in the white-collar world…The economy is forcing dramatic changes within IT that are going to be unpleasant for a lot of people, and one of them is outsourcing,” he adds.

Many U.S. workers protest that jobs are going offshore at a time when unemployment is high and IT budgets tight. Another concern is that the savings figures might be inflated. “Many outsourcing arrangements . . . can actually cost a firm more in the long run,” says Adam Yatsko, branch manager of Robert Half Technology, an IT staffing firm in Westwood, Calif. Hidden costs include those associated with vendor selection, layoffs, contract management and vendor turnover, he says.

Fueling the discontent are figures such as these from Forrester Research: By 2005, the firm estimates, 600,000 U.S. jobs – whether IT, back office, customer service or sales – will move to countries such as China, India, the Philippines and Russia. By 2015 the number will climb to 3.3 million, Forrester says.

But now, offshore outsourcing accounts for only about 3% of IT jobs, contends Harris Miller, president of the Information Technology Association of America. Jobs are being lost, but the numbers are overblown, he says. People also fail to consider the impending shortage of high-skill workers in the U.S. as baby boomers reach retirement age, he adds.

McKinsey Global Institute (MGI) reports that at current productivity levels, the U.S. will need 5%, or 15.6 million, more workers by 2015 to maintain its current ratio of workers to the total population and current living standards. So despite job loss fears, the U.S. will need more workers by 2015, MGI predicts. MGI also estimates that for a number of reasons – including reduced costs for consumers and new revenue from sales in offshore countries – offshore outsourcing actually creates value for the U.S. Every $1 that a domestic company diverts offshore creates $1.12 to $1.14 in value retained in the U.S., MGI says.

Getting ahead of the issue

When a company outsources a process, it must still manage and control it internally, and that requires key people on staff. One huge insurance and financial services company that decided to outsource all IT operations offshore gave pink slips to its entire IT staff before realizing its error, Steve DeLaCastro, a New York outsourcing practice leader for Tatum, recalls: “About 70% of those people were rehired at an average 40% more than when terminated.”

Experts offer other suggestions to temper the discord that offshore outsourcing can trigger:

•  Bring together key stakeholders and compare benefits and risks, says Stephanie Moore, a vice president at Forrester.

•  Consider the vendor’s services, metrics, management, logistics and more. “Beware the offshore vendors that come into your company and talk only price. They have sweatshop stamped all over their heads,” DeLaCastro says.

•  Document verbally and in writing, DeLaCastro says. Set very specific expectations of performance, Miller adds.

•  Under the “looking-out-for-your-job” category, beef up your business and vendor management skills. “IT management in the future is not going to be about managing programmers or network technicians,” she cautions. “It’s going to be about managing service contracts.