E-BUSINESS SPECIAL REPORT

The True Cost of Overseas IT Outsourcing

For enterprises that want to cut IT costs, one answer is to ship some high-tech work overseas, to places like India, Singapore, the Philippines and even Russia or China.

Generally, cost savings for a company range from 25 to 40 percent. “A lot of companies that haven’t looked at this already are starting because it is hard to ignore — especially in this economy — the financial advantages [of] doing this,” Gartner research director Frances Karamouzis told the E-Commerce Times. “So, if you can get it to work, it can be beneficial.”

Shipping Work Overseas

Indeed, the trend toward outsourcing U.S. IT work to overseas firms will not wane anytime soon. A total of 3.3 million U.S. service industry jobs — IT, back office, customer service and sales — will go overseas in the next 15 years,according to Forrester Research. That translates to US$136 billion in U.S. wages lost to foreign workers.

Meanwhile, Gartner has forecast that the IT outsourcing market in NorthAmerica will grow from $101 billion in 2000 to $160 billion in 2005. Andthe research firm’s Dataquest unit said 26 percent of companies already using offshore services expect to double their spending in this area within the next year.

In software development alone, major firms like Oracle and i2 Technologies are following the path blazed by other Fortune 1000 companies to low-cost development centers, such as India.

It’s the Economics, Stupid

Besides cheaper labor rates, technology itself has helped spur the raceto hire overseas help. The cost of high-speed bandwidth has fallen as a result of telecommunications deregulation and new undersea cables. This means not only that digital work can be electronically shippedfaster and cheaper, but also that overseas partners can be managed via videoconferencing links, according to a recent Forrester report.

Technology also helps with overseas management through Internet-basedcollaboration tools and standardized business applications — the latter ofwhich also means projects are easier to outsource to other firms.

Another advantage of using overseas workers falls into the “time-is-money”category: U.S.-based teams and overseas workers can work virtually aroundthe clock because of time differences.

Overseas IT outsourcing also can help with what Gartner’s Karamouzis called”peaks and valleys” at companies. “If you have a big project where you need50 people, instead of hiring those 50 people right then and there, you cango to a service provider that can give you good quality and a good price,”she said. “Then, when you no longer need them, it’s not like you need to layoff all of those people.”

Management Issues

Although overseas outsourcing can be of great benefit to a company’s bottomline, the work process between a U.S. company and an outsourcing concern can easily go off course without firm management processes in place. “If youmanage it inappropriately, you’re going to have a serious headache on yourhands,” Yankee Group programmanager Andy Efstathiou told the E-Commerce Times.

Companies that have mastered overseas outsourcing have sound businessprocedures as well as good management in the remote country, eitherthrough partnerships or direct subsidiaries. “After they became morefamiliar with the environment, they generally either buy out the jointventure partner or set up their own subsidiary over there,” Efstathiou said.

Offshore IT outsourcing operations tend to be “subservient,” though, whichcan lead to development problems. “[The outsourcers] don’t have a lot of industry depth or a lot of business-process depth,” Gartner’s Karamouzissaid. “One of our clients’ major complaints is [that] because they don’t have those skills, their projects don’t have any added value, innovations or insights.”

What About the Small Fry?

Because of logistics and management concerns, small- to medium-size businesses (SMBs) are less apt than Fortune 1000 companies to go the outsourcing route. The large enterprises are usually the ones that set up their own subsidiaries in lower-cost countries.

“How small to medium-sized companies benefit from this is if such a companywent to an Accenture for its help,” the Yankee Group’s Efstathiou said.

Even so, SMBs are expected to become a bigger force in this area. Forresterhas forecast that such companies will account for 10 percent of all outsourcingby 2005 — up from just 1 percent today.

What U.S. Workers Can Do

Outsourcing’s effects are not all positive, though. Workers in the United States who are displaced by overseas IT outsourcing can have a negative effect on both the overall economy and the high-tech sector, because their earnings potential is decreased by both their unemployment and a tightened job market.

Companies that shift “basic” IT tasks overseas, though, are in effectsending signals to unemployed U.S. high-tech workers to upgrade their skillsto compete against this latest threat to their jobs.

“If [workers] refocus their skill sets on higher systems design and analysis,on the type of technology that’s going to be the next big success in themarketplace, then they will get in at the early stage of a winningtechnology and presumably increase their lifetime earnings as well asincrease the U.S. economic value,” Efstathiou said.

8 Comments

  • After WWII the United States needed to redirect its workforce from war production to a peacetime consumer economy. We succeeded beyond our wildest dreams, and product design engineers were the rock on which that recovery was built. I chose to enter the engineering field, knowing that I would always have a place in the American dream. In 1971, when I came stumbling into the workplace, the engineers that were born out of WWII were there to mentor me through the learning process. No AM ount of education could replace the tribal knowledge handed down from those experienced practitioners, and it was only after years of their direction and patience that I was able to do the job I do now.
    Throughout industry there are similar trades and professions; Industrial engineers, model makers, toolmakers, fixture designers and fabricators and production engineers, all of them standing on the shoulders of the ones that came before.
    Today students think carefully before choosing engineering, or any trade in the manufacturing sector as a career. They can see the trend, and it seems irreversible. Soon, it seems, we’ll be a nation of CEOs and personal service people. What then? What happens when this country’s best and brightest are all MBAs? When those MBA’s tell their Chinese managers to tell their marketing VPs to tell their Engineers to design the next generation PDA, and the reply is "Kiss our collective ass!"? "We’ve learned your design, tooling and manufacturing tricks and we’ve passed them on to our next generation". "So you can take your New World Order and go fish." Do we think that once we are dependent on the rest of the world for our cars and televisions and computers (not to mention defense weaponry) that they will put up with us? When they disagree with our foreign policy they will simply embargo us.
    Let me make myself clear on one point. I want the rest of the world to be able to end the devastating poverty and inhuman conditions in their own countries. And when they reach an economic critical mass it will be a natural thing to assert their independence. But we have to be prepared for that time. We cannot trade skills developed over decades for this quarter’s profit. Short-term profitability, I believe, is the root cause of this mindset. We cannot continue to believe, as publicly owned companies would have us, that the shareholder is the customer instead of the end user of the product!
    When the rest of the world asserts its independence, which MBA will design the products, machine the tools, fabricate and assemble the parts? And if they see the light, if they realize the folly of their scheme, in ten years when they call for a new call to arms in education and deliver a new generation of college-trained engineers, who’ll be there to mentor them? I hope to be on a Montana fly stream.
    I’m lucky. I’ll last in this profession until retirement. My children saw the light and they’re in marketing and conservation science. But I still fear for their future. Everything is connected, and their future as much as anyone’s is dependent on the foundation of a strong stateside workforce.

    • The sad part about this latest bust is that many very talented people are still looking for work 1 1/2 years later while their capital runs dry. The unemployment laws don’t allow the workers to upgrade their skill sets because their meager unemployment checks are then cut off too. Unfortunately, many of my friends caught by the post 9/11 layoff wave that had gotten their MBAs while working full time before the bubble burst, are now applying their talents to other industries.

      • But the investment in overseas competitors to U.S. IT workers is not limited to simply putting work OVER THERE as opposed to Stateside. It is an involved process of systematic decommitment from the United States.
        Leading U.S. universities have had their research budgets pruned to HALF of historical AM ounts, both from government and corporations, including MIT and CalTech. So it is no surprise that the winners of the ACM International Collegiate Programming Contest — hardly something in which one scores points by having a lower hourly wage — was won this year by teams from India and eastern Europe.
        Does all the United States have to offer to the world any longer are brave young people lauded by government and CNN who are willing to go to strange places and be cannon fodder?

  • I think there are a couple of things these ‘companies’ need to understand:
    * LOYALTY – The average worker knows what’s going on. We see that the companies are outsourcing our jobs to overseas companies to save money. The companies should not be surprised when workers jump jobs based on money since the companies don’t show any loyalty to their employees.
    * MONEY – When companies reduce the employee-company relationship to a monetary one then they should be prepared for the results: poor morale, attendance problems, increased turnover and a decrease in productivity.
    * TAXES – When these jobs shift overseas who is going to be paying taxes? How are the local and state governments going to be giving tax breaks to these same companies when they’ve laid off 10% of their IT staff? Who is going to be paying the Federal, State and Local taxes?
    * RIPPLE EFFECT – I wonder if these ‘managers’ making the outsourcing decisions realize that 10% of the schools will close, 10% fewer cars will be bought, 10% less of their products will be sold, etc. Mind you this is in one sector – IT – but how long before other sectors of our job market (look at manufacturing) go the same way?
    * IMPROVING EFFICIENCY: It seems to me that companies are outsourcing jobs overseas to compensate for a lack of efficiency and poor management. I think companies have forgotten that shipping jobs overseas doesn’t bring new clients in the door. Also, cutting costs is not the same as being profitable and making money.
    * EDUCATION – When ‘companies’ complain of a lack of technical workers or that US technical workers don’t have the right skill sets, have they created the very issue they’re complaining about? When more and more jobs go overseas, more technical people will get out of the business since the pay will go down, jobs are scarcer and there is less incentive to improve your skill set. High school students won’t choose Computer Science as a major, there will be less college graduates with an IT degree and so fewer domestic workers in the job market. Prices will go up for those companies unable to ship work overseas, and the ‘specialists’ left in the market will be very expensive since they will be relatively rare.
    * COMPANIES BEWARE: Don’t be surprised by the backlash of feeling from these laid-off workers. We’ll buy less of your products, work less hours and feel less committed to ‘your’ company. You shipped our jobs overseas, so don’t be surprised when your worthless job ends up over there as well.
    I wonder how many IT jobs could be saved if the CEOs and other ‘managers’ got less stock options, fewer free rides on the corporate jet and a million less on their bonus or salary?

  • The fact is there are many companies with skilled workers already. It isn’t that they do not possess the skills required. Many employees find themselves training their replacements without knowing it….Then they are terminated. As for offshore, we are only hurting ourselves in this country. Before long, without the jobs available in the USA, we will become a third-world country, jobless, and the crime rate extremely high. The only way to stop this is to back off of overseas outsourcing and to change the Immigration Act of 1990.

  • The benefits of oursourcing is primary based on economics. Lower cost of technology labor – lower expense – which will allow more capital to invest in other aspects of the business such as marketing. The key in overseas IT outsourcing is partnering up with a US Firm that is fully familiar with the culture, business practice and companies overseas.
    Irving Sarreal
    CIS One
    http://www.cis-one.com

  • Actually, the other dimension in the outsourcing relationship is the ‘maturity’ of the service provider… Especially in the SMB situation, an outsourcing partner who will nurture the relationship in the early stages is a big plus…

  • The advice for IT professionals is erroneous in terms of new technology…Look at Oracle, Sun, Microsoft, etc. setting up R&D centers in India, China, etc. They are going to be the first ones with the new technology and not a US IT professional. Consider .NET…that is now being developed in India and not in the US and will no doubt be developed further in India and not in the US…
    Frankly, my fiance (an IT professional with outstanding technical credentials, as well) and I would like to ask these big companies one simple question:
    Given that you are developing this technology overseas and not in the US, what aspects of the new technology should the US IT professionals be focusing on so they can have a career arc of 5-10 years and not 5-10 minutes?
    Our view is simple: we are looking to get our MBAs and migrate out of the technical arena into management and use our skills and talents here in the US…
    By the way…catch this job opportunity posted on http://www.oracjobs.com…this is scary:
    Company: SWATHI BUSINESS SOLUITONS
    Job Title: Developer/2000
    Job Location: Nationwide (USA)
    Job Number: 222326
    Job type: Direct/permanent
    Date Posted: Nov-24-02
    Job Description:
    CANDIDATES HOLDING H1-B OR GREEN CARD IN ORACLE D2K, CURRENTLY RESIDING IN U.S. ARE REQUESTED TO MAIL ACROSS THE RESUMES FOR IMMEDIATE PLACEMENT WITH FULL CONTCAT DETAILS & MAIL IDS WITH 3+YRS OF EXPERIENCE.
    CONTACT PERSON : ARUN
    MOB:919840114784
    Company Information:
    SWATHI BUSINESS SOLUITONS
    HUMAN RESOURCE CONSULTING COMPANY
    Contact: Mrs.PARTHASARATHY
    Chennai, 600016
    INDIA
    Phone:

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