Startup opens offshoring alternative in distressed Michigan

New domestic IT services company, headed by offshore vets, gets state support

Michigan's unemployment rate, at 17.5%, is among the nation's highest. At the same time, the state boasts a large pool of highly educated workers.

The available workforce, along with low real estate prices and aggressive financing programs available from the state government, is starting to attract new businesses.

One of the latest arrivals, Fremont, Calif.-based IT services firm Systems in Motion Inc., (SIM) has opened an operation in Ann Arbor that now employs some 35 workers, more than half the company's overall workforce of 65 people. In five years, start-up SIM hopes to employ about 1,100 people in Michigan.

SIM's plans for the state was cited by Michigan Gov. Jennifer Granholm in her State of the State address earlier this month.

SIM is the latest IT firm boasting a domestic business model designed to compete with offshore providers. SIM, though, has a different approach than the oft-used strategy of running operations in rural locations and home offices. SIM is focusing instead on strong employee training and development programs and on creating streamlined processes.

What's particularly interesting about the SIM effort is that its management team has a wealth of offshore experience.

The executive team includes CEO Neeraj Gupta, previously an executive at Patni Computer System Ltd., in Mumbai, India, and Debashish Sinha, the chief marketing officer who had held a similar post at HCL America Inc., the Sunnyvale, Calif.-based division of HCL Technologies in Noida, India. Michael Parks, the chief delivery officer, is former CIO at Virgin Mobile USA, and executive vice president in charge of IT operations at Wells Fargo & Co.

This team could have easily created an outsourcing company based offshore with offices in the U.S. While such a strategy has proven successful for many IT services firms, "I don't think the world needs another offshore company," Sinha said.

Instead, the SIM management team is using their offshoring experience to make a case for keeping work onshore. SIM believes its delivery costs are some 30% below in-house IT operations and comparable to those of offshore development firms.

Sinha says that the differences between offshore and onshore costs narrow when security problems, management issues and overseas travel are considered. He also contended that offshore workers may be as much as 20% less productive than domestic workers because of location and communication issues.

To maximize the productivity of its workers, SIM is focusing on workforce development.

Prospective employees hired in Michigan must go through an intensive training process, specifically focused on the work they will be doing at SIM. It's a six week training program that runs daily between 8 a.m. to 5 p.m. at Eastern Michigan University in Ypsilanti. Two classes of 15 students, one on quality assurance and testing and another on infrastructure systems and support were recently completed and more are planned this spring.

The students attending are eligible for financial support from the state's fund to help displaced workers.

There is no shortage of eligible students with the technical background to qualify for jobs like those available at SIM, said Barbara Hopkins, director of noncredit programs at EMU. "I can't tell you how many engineers have lost jobs" because of cuts at automakers and their suppliers, she said.

The unemployment rate in southeast Michigan may be approaching 30%, said Hopkins. "When you line up 10 of your friends and three of them don't have a job it's very disheartening."

SIM was formed last summer and is still running on start-up funding. In September, the state awarded it a $7.4 million credit to build in Michigan. The company now has five customers that Sinha wouldn't disclose. Salaries will range from the $30,000 for recent college graduates to $80,000 for more experienced engineers, he added.

The downturn in Michigan's economy is helping SIM get started due to low real estate cost. The cost of infrastructure, overall, is now less costly in the U.S. than in Bangalore, said Sinha.

Michigan is but one of several states now offering financial help to offshore firms.

For instance, Tata Consultancy Services opened a North American Delivery Center in Milford, Ohio, after the state offered about $19 million tax credits and other incentives. As of November, 225 Ohioans worked at the new Tata facility, according to the governor's office.

But Tata's business model is offshore delivery and the number of U.S. employees is a small fraction of its global workforce.

SIM, by contrast, plans to deliver all its work onshore (SIM calls its model "inshoring") using what it calls the best service delivery practices, such as Information Technology Infrastructure Library (ITIL).

Sinha said he believes that many large IT services providers are focusing on developing offshore operations rather than domestic IT talent. He noted that many users today either turn to boutique firms or IT staffing agencies so SIM "fills a very significant gap in the market," he said.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov, send e-mail to pthibodeau@computerworld.com or subscribe to Patrick's RSS feed .

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