Friday, May 14, 2004

Offshore outsourcing is relentless

Offshore outsourcing is so mainstream that by next year, more than 80% of U.S. companies will have had high-level discussions about the topic. And 40% will have completed some kind of pilot program or will be using near-shore or offshore services.
Despite that assessment, made by Gartner Inc. at an outsourcing conference here last week, offshore outsourcing remains a difficult issue for executives to talk about. In fact, many attendees were skittish about responding to questions for this article, except in the most general terms.

Corporate officials did, however, acknowledge trends related to the politically charged issue. For instance, BP PLC in London is discussing offshore work with its existing outsourcers, IBM and Accenture Ltd. "They are offering us an opportunity to have consistent performance at a lower cost," said Russell Taruscio, downstream chief financial officer at the oil company.

Adding offshore components to outsourcing contracts is on the rise, according to IDC. In a report last week, the Framingham, Mass., research firm said offshore outsourcing is the dominant trend in the IT services industry, with 42% of the application management contracts now having some offshore component. A big reason is cost.

Bob Walters, IT director at supply chain system provider Intermec Technologies Corp. in Everett, Wash., surveyed development costs recently at an SAP AG user conference. He determined that U.S. companies are charging $80 to $120 per hour for programming work, while the fee for offshore providers is about $40.

When you can pay a third of the price, offshore is "something that has to be considered," said Walters.

As offshore business grows, so does competition for it. Pioneering India-based offshore companies, such as Tata Sons Ltd., are facing increasing competition from the large U.S. IT consulting firms. Accenture CEO Joe W. Forehand, who spoke at the Gartner conference, compared the trend to the previous exodus from the U.S. of many manufacturing operations. "The way we look at it, the industrialization of IT is a reality, and we have to embrace that," he said.

Competition is also becoming more global. In the vendor exhibit hall, Bamboo Networks Ltd.'s mere presence raised eyebrows. Some rivals said it was the first China-based outsourcer to set up a booth at a U.S. outsourcing conference.

China is considered something of a sleeping giant in the offshore world that isn't quite ready to compete with India. China "represents the next wave" in offshore outsourcing, said Traci Gere, an IDC analyst.

Rajesh Rao, chief operating officer at Hong Kong-based Bamboo, which operates an offshore development center in Guangzhou, China, said the company believes it has developed its offshore processes sufficiently to compete for U.S. customers.

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