• United States

Outsourcing debate to rage again in 2004

Dec 19, 20037 mins
Enterprise Applications

Industrialized nations have engaged in cross-border outsourcing for decades, but this year the issue came to a head for the world of IT, which has seen the debate about “offshoring” spill from technology circles into the realm of politics, macroeconomics and labor unions.

Controversy about offshore outsourcing, however, is likely to generate even more headlines in 2004, since corporate plans to increase outsourcing coincide with an increasing number of offshore outsourcers entering the global market.

What appears perhaps most threatening to the Western IT worker in the long term are efforts on the part of more experienced outsourcers to move up the labor chain, from basic programming jobs to high-end design and project management work.

In the U.S. alone, the value of IT services provided by offshore labor will double to $16 billion next year and triple again to $46 billion by 2007, according to market research company IDC, in Framingham, Mass.

Though India has up to now grabbed the lion’s share of offshore work, competition is bound to heat up as more countries try to get a slice of the pie. One telling sign: at TechXNY in September, about half of the more than 180 vendors participating in the New York conference, one of the biggest business-oriented IT events in the U.S., were outsourcers. The bulk of those were from countries as far-flung as Bulgaria, the Philippines, China, Mexico and South Africa.

Companies that hope to siphon off some of the work that typically would flow to India say the cost of doing business there has risen, and that in some areas, the country’s telecommunications and manufacturing infrastructure is not world-class.

China, for example, has more developed infrastructure than India, and Chinese companies can offer lower prices than their Indian rivals, especially for small and medium-size companies, said Xu Xiaoyu, vice president of sales and marketing at Shinetech Software Development in Beijing and a former consultant at Accenture Japan.

Shinetech, established in 2001, this year doubled in staff and tripled in revenue. It is on target to generate $300,000 in revenue and now has 50 employees, including 40 programmers who provide custom .Net and Java software development services to customers in China, the U.S. and Europe.

Xu thinks China’s IT outsourcing industry is poised for big gains in the coming years.

“It has great potential, it could develop dramatically within a couple of years,” Xu says. “The whole turnover of the market in China would be increased at least double in the next year or even three times or four times in the next several years.”

Outsourcing to Chinese companies can save U.S. customers 50% or more on software development costs for “the same service with the same quality or maybe even better,” Xu says.

Facing such competition, it’s natural that the more experienced outsourcers are trying to move into high-end jobs.

“The opportunity seems quite unlimited, as customers are increasingly exploring newer areas for outsourcing to India,” said Ravi Ramu, chief financial officer of MphasiS BFL Group, a software services and business process outsourcing (BPO) company in Bangalore.

The bulk of India’s software exports so far have consisted of custom application development and maintenance. That is changing, as some Indian companies venture into IT consulting, systems integration, infrastructure management, global rollouts of software packages, and even product development for clients ranging from technology vendors to non-IT corporations.

“High value work that used to be retained in-house earlier, like design, R&D, and product co-development is being outsourced to Indian vendors that are able to prove their capabilities in taking up such work and delivering successfully, meeting global standards of quality and punctuality,” said Ravindra Datar, principal analyst for IT services and BPO at Mumbai-based Gartner India Research and Advisory Services.

The shift up the value curve seems to be happening faster in the wholly owned development subsidiaries of multinational technology companies in India.

Intel’s development center in Bangalore, for example, started off doing bits and pieces of development work and now has taken over responsibility for a new 32-bit successor to the Xeon chip that is aimed at the enterprise market.

“On the enterprise processor, we decided we will do it end-to-end from the start, starting with product concept and architecture, ” said Ketan Sampat, president, Intel India, who added that the team developing the chip has a product architect whose job is to talk to customers worldwide and then work with the development team to define the processor architecture.

Though profits from this effort will ultimately help fill the coffers of a U.S. company, the bottom line for U.S. workers is that high-end IT development and conceptual work that was once thought to be the province of the West is now being accomplished elsewhere.

Entrepreneurs from Asia to Eastern Europe are also looking for a piece of the action on the high end.

“We try to offer more valuable services because we feel the pressure from Belarus, Ukraine, India,” said Marian Hanganu, marketing manager for TotalSoft, a software company in Bucharest. “We have invested in infrastructure and project management capabilities. We show our server rooms, our software infrastructure, we can manage projects.”

However, technology staffers working on product design and other high-end IT jobs in the U.S. and Europe do not need to push the panic button. The attempts of new outsourcers to get into the global sourcing market, and efforts by more experienced outsourcers to go up-market, will inevitably run into hurdles. It takes time to learn language and communications skills, gain project management experience and learn new programming methodologies.

For example, Chinese IT staff tend to have very strong technical skills but they often lack the business knowledge necessary to make the most effective use of IT, said T.J. Fang, assistant vice president of Quanta Computer in Taoyuan, Taiwan, one of the world’s largest contract notebook manufacturers.

“I still remain centralized in Taiwan,” Fang said. “My IT people (in Taiwan) are more mature. We know all the production, everything.”

“In mainland China, I tried to hire a lot of highly educated IT people but they still have problems. They don’t know what is management, what is production,” he said. “They are still waiting for you to give the clear instructions.”

Indian companies also may find it slow going to move up the value curve.

Indian software companies have typically not been involved in a significant way in mission critical IT systems such as stock trading systems, notes MphasiS’ Ramu.

“Indian software companies are trying to go up the value curve into software architecture and IT consulting, but that will take time, and a key issue here will be whether they can scale to have and manage enough people to do that kind of work,” he said.

In outsourced product development, it also may be some time before Indian companies get into product definition and architecture, according to Marc Hebert, executive vice president for marketing and alliances at Sierra Atlantic in Fremont, Calif. “All of product definition and most of the architecture is today done in the U.S. because in the context of a software product, the vision and the innovation for the product would reside with the founders of the companies and their core teams back in the U.S.,” Hebert said.

In addition, large contracts that require an outsourcer to take over the IT assets of a client have eluded Indian companies, although they have bid on such deals, said Lakshminarayana Kollengode, corporate treasurer at Wipro, a Bangalore-based software services provider.

“Infrastructure management is very nascent in India, and customers doing large outsourcing deals would automatically call in an EDS or an Accenture rather than automatically call in a Wipro,” Kollengode said. “Such projects also tend to be very asset intensive, and at this point we are not too keen to take on assets on balance sheet. We are still relatively small in an international context. These contracts are sometimes billion dollars deals, and companies like us have balance sheets the size of a billion dollars.”

While there is no doubt global competition for IT jobs will increase in 2004, it does appear that Western workers have time to consider how best to deal with the changing worldwide labor market.

(Peter Sayer in Paris contributed to this report.)