Overseas outsourcing gains momentum

NEW YORK – The decision to outsource about 20% of its application outsourcing overseas came down from Aetna’s upper management, and it’s hard to argue that the move hasn’t paid off financially.

The insurance company pays developers in India $20 an hour vs. $60 an hour for U.S. workers, and the quality of the work has met expectations. The company is looking to outsource as much as 30% of its apps development going forward.

“They’re like a remote office for us in India,” says Gene Speicher, Aetna’s vice president of vendor management and offshore development.

Aetna is one of a growing number of companies reaching offshore for development expertise, whether it be for mainframe, client/server or Web applications.

While only 15% of 45 CIOs and IT directors interviewed recently by consultancy E5 Systems said they outsourced software development offshore today, 85% expect to do so within the next five years. Cheaper labor costs are the impetus for offshore outsourcing, said E5 Systems President Gordon Brooks, who presented the findings during a roundtable discussion held earlier this month with about a dozen IT managers at art auction house Sotheby’s, a survey participant.

Those surveyed cited communications and project-management problems as their main concerns in outsourcing development overseas.

Outsourcing offshore “is high risk, high reward,” Brooks said.

It can save money, but there’s no guarantee that a software project won’t have quality problems, run late or cost more than expected, Brooks said. Such problems also exist in outsourcing software projects domestically, but they are compounded when software programmers are several time zones away in foreign countries with different laws.

The power to mess up

“And [overseas outsourcing firms] have the power to mess you up,” Brooks noted. “They have so much of your data.”

“Outsourcing doesn’t always keep up with the changing business model, and that can come back to haunt you. There’s a lot of difficulty in defining service-level agreements for outsourcing – trying not to be too tight or too flexible,” he added.

Aetna, which outsources development through Infosys Technologies in Bangelore, India, cites cultural issues as being the most prominent challenges in overseas outsourcing.

There’s a reluctance, for example, among many Indian IT workers to explain problems or deliver bad news as forcefully as their American counterparts, said Speicher, who noted that anywhere from 200 to 600 Infosys programmers might be working for Aetna at a given time. But Aetna’s nearly five years of outsourcing experience in India has been so positive that the insurance company is willing to explore similar options in China – where costs can be as low as $6 per hour.

Joseph Snaido, vice president of systems development at investment ratings firm Moody’s and a roundtable participant, said his company was still uncomfortable with going offshore, but he will evaluate it. Snaido said he strives to keep the most innovative programming for business needs done in-house but is open to outsourcing more routine software maintenance.

Freeing up resources

“To me, outsourcing is not so much about cost savings as about freeing up people,” Snaido noted. Sometimes outsourcing offshore might not be an option for banking institutions that face prohibitions on sending customer data out of the country.

But the more routine software programming is headed offshore to the detriment of higher-paid domestic programmers, who can no longer be content to be just techies uninvolved in interacting with business managers on projects, some say.

“Pure technical skills are the most outsourceable,” Speicher said. “That’s the danger in just being a nerd now. We want to hire developers with people and leadership skills. But by and large, only a few really have the project-management skills.”