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IT's Global Itinerary: Offshore Outsourcing Is Inevitable

By next year, 80% of CIOs will have marching orders to take some IT offshore.

September 15, 2003 12:00 PM ET

Computerworld - Globalization will hit virtually all large corporate IT departments within the next year. By 2004, eight out of 10 CIOs will have direct marching orders to move offshore at least part of the technology services they provide to their businesses. Four out of 10 companies will already have done so, according to research from Gartner Inc. in Stamford, Conn.


"We see this as an irreversible megatrend," says Gartner analyst Rita Terdiman. The short-term reason: Cost savings that can run as high as 40% are simply too compelling to ignore in today's economy. Moreover, outsourcing helps companies realize longer-term strategic goals to increase IT staffing flexibility and gain access to an expanding base of world-class IT skills, so they can quickly respond to business opportunities. On the financial side, companies want to purge their books of as many fixed IT costs as possible.


"I can't think of a single meeting I've had with a client in the last year without offshore being a topic," says Bob Pryor, who heads the global outsourcing practice at Cap Gemini Ernst & Young. "Some users are demanding that as much as 80% of a contract's work be sent offshore."


And just for the record, Gartner research as well as Computerworld interviews with more than two dozen CIOs indicate that backlash from IT job losses in the U.S. is having little, if any, effect on companies' outsourcing plans. As one IT director at a multibillion-dollar global electronics company put it, "When the train is coming down the tracks, it doesn't do you any good to stand on them."


But global outsourcing isn't just about getting programmers in India to do routine code-fixing anymore. The field has gotten more complex, with new players, new strategies and new concerns. Here's a rundown of the latest trends in offshore outsourcing.


  1. Multisourcing Users are increasingly doing business with multiple service providers in different countries, depending on where they can find the best skills for the best price. This holds true even if a company's primary services provider is one of the large domestic outsourcers, such as IBM Global Services or Accenture Ltd., because those companies are aggressively tapping the offshore pool of IT and business skills. IBM Global Services is India's fifth-largest employer, and in March, Accenture opened a facility in Dalian, China, with 100 IT workers to perform applications development and maintenance, systems integration and business process outsourcing.


    Electronic Data Systems Corp. currently has about 1,000 IT workers in India and will employ 20,000 workers in other offshore locations by next year. Last year, Plano, Texas-based EDS launched its Best Shore service, which involves sending work offshore to be performed at one or more of its 16 IT facilities in 11 countries.


    "Global outsourcing is a $550 billion industry, yet the top five players don't command a 20% market share," notes Accenture CEO Joe Forehand. "There's no one provider who is best-of-class across all services," which means multisourcing will only continue to accelerate, he says.


    The upshot for IT managers: "Expect a more complex [outsourcing] environment," cautions John Schmidlin, CIO at J.P. Morgan Chase & Co., which has a $5 billion, seven-year outsourcing contract with IBM. "This stuff is very complicated and intricate."



  2. Reshuffling Skills As applications development and maintenance move offshore, corporate IT departments are rebalancing their mix of in-house skills, de-emphasizing technical acumen in favor of managerial experience and business process knowledge. "The skills you really need in-house are business analysis skills. A business analyst is somebody who understands process mapping, data modeling and system prototyping," says Mike Hugos, CIO at Network Services Co., a $6.8 billion distribution cooperative in Mount Prospect, Ill. The company currently outsources its Web-based order management system to a domestic services provider, but is considering moving other IT services offshore.


    In addition, IT architects "who look at new technologies and decide which ones to adopt" are extremely important in an outsourced environment, says Kim Ross, CIO at New York-based Nielsen Media Research Inc., which since 1995 has been outsourcing IT work to Cognizant Technology Solutions Corp., an Indian outsourcer with U.S. headquarters in Teaneck, N.J. "In our outsourcing model, the sequence of activities is that our [in-house] people determine the business need and translate that to requirements," Ross says. "The requirements are then handed over to the outsourcer for implementation."


    Contracting, negotiation, compliance monitoring, financial and accounting skills are also critical in an increasingly complex multisourced IT environment, according to Schmidlin. "We spend a lot of time on who's doing what and on whose nickel," he says.


    "Our focus this year is to move people in more technical roles into business process roles and to move the more technical work offshore," says an IT manager at a large electronics manufacturer that has outsourced IT support for both mainframe and distributed software applications to offshore service providers. The manager requested anonymity. Internally, the manager says, the emphasis is on developing business account managers who are IT professionals that work with end users to "discover and recommend ways to use IT to improve business processes."



  3. Emergence of New Services According to a June joint study by IDC, an IT market research firm in Framingham, Mass., and TPI, an outsourcing advisory firm in The Woodlands, Texas, 42% of all outsourcing engagements have an offshore component, and this "will continue to spread to new segments and deepen its hold on the industry." Business process outsourcing is the fastest-growing segment of the market, and offshore providers are expected to take on an increasing volume of human resources, call center, finance and accounting functions.


    Beyond that, outsourcers are expanding their reach even further with industry-specific offerings. For example, Accenture processes more than 30 million meter readings for the utility industry and 300 million airline reservations annually. Both services are examples of the so-called "industrialization of IT," which is the ability to process certain standardized transactions on a global basis.


    Service providers in India, which are especially renowned for their software development discipline, are expanding their services to include consulting and training in software design and development. Bangalore, India-based Wipro Ltd., for example, recently launched a consulting arm that specializes in training companies in the Software Engineering Institute's Capability Maturity Model.


    Another fast-growing offshore outsourcing segment is infrastructure services, including desktop support, help desk, and various network monitoring and management functions. That niche now accounts for 80% of Wipro's annual revenue, up from just 1% a few years ago, according to CEO Vivek Paul.



  4. Offshore Handoffs Outsourcers, like users, are also looking to reduce their fixed IT costs. To do so, experts predict, service providers will sell a growing portion of their fixed IT assets back to hardware and software vendors, such as Sun Microsystems Inc. and Dell Inc., then lease those assets to run applications and other services for their enterprise customers. In another so-called daisy-chaining trend, large, mature offshore outsourcing vendors, particularly those in India, are subcontracting IT work to newer, lower-cost market entrants in China, Vietnam and other countries.


    Most U.S.-based global outsourcing vendors have also formally partnered with specific offshore providers. For example, Deloitte Consulting in New York has a deal with iGate Corp. in Pittsburgh to provide IT services in India, and EDS partners with Satyam Computer Services Ltd. in Hyderabad, India.


    Experts say that user companies looking for the best cost savings must allow outsourcing vendors to perform services in a way that will enable them to achieve the greatest economies of scale. "It should not matter to the user which hardware or software the vendor uses if the user has outsourced the [business] outcome to the outsourcer," says Martin Cole, head of Accenture's outsourcing business.



  5. Pricing Ups and Downs Despite outsourcing experts' repeated advice against basing offshore decisions on cost alone, the reality in today's economy is that cost savings are what motivate many companies' offshore choices. Of 252 senior and corporate IT managers interviewed by Computerworld and Concord, Mass.-based InterUnity Group Inc. this spring, 44% ranked reducing and controlling costs as their No. 1 reason for outsourcing to non-U.S. locations.


    "The cost savings have to be there," says Nielsen's Ross. "One of our ground rules is to avoid spending more money [than it would cost to do the same work in-house]. We see 20% to 30% savings on projects on the average."


    But today's offshore cost savings won't last indefinitely. Increasing demand will inevitably drive up labor costs in mature offshore centers, such as India, where Gartner analyst Partha Iyengar expects demand to outstrip supply within five years.


    For now, though, some users are opting to take vendors up on offers of discounts of up to 5% in exchange for lengthening the terms of existing offshore contracts. Still, experts warn that users should be wary of lowest-cost deals. That's because as demand goes up, so will wages, which will drive up offshore vendors' costs. With financial contract terms locked in with users, vendors will have little choice but to decrease service levels to contain their own costs.



The bottom line, according to analysts and CIOs happy with the benefits achieved through outsourcing, is that those companies that haven't done so are missing the boat. Schmidlin says the biggest lesson he learned from offshore outsourcing is that he wished he had done it five years earlier than he did.

See the full Outsourcing Special Report.


Why does your organization outsource to non-U.S. locations?
Reduce/control costs44%
Free up internal resources20%
Gain access to world-class capabilities13%
Increase revenue potential13%
Reduce time to market11%
Increase process efficiencies11%
Follow company philosophy of outsourcing noncore activities11%
Compensate for lack of appropriate skills8%
BASE: Survey of 252 corporate IT managers in the U.S.; respondents were asked to select the three most important reasons.


Source: Computerworld and InterUnity Group Inc., Concord, Mass., April and May 2003



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