Big Outsourcers: Behind the Eight Ball

Computerworld - The safest outsourcing option has been, and continues to be, the large U.S.-based operations such as IBM, Electronic Data Systems and Accenture. However, these big outsourcers are facing serious challenges and finding themselves behind the eight ball. Newer, smaller firms have changed the rules and are forcing the big guys to play catch-up. The new entrants are stealing business by offering dramatically lower prices, thus creating a price floor against which the big companies have to compete.
There are three main reasons for the price differential. First, the upstarts can undercut traditional outsourcers' prices because most of their technical staffs are located in lower-cost countries. The price difference is enormous, often as much as $180 per hour vs. $25 per hour. But beware. Quoted rates don't provide a true apples-to-apples comparison. Be sure to calculate the total cost of outsourcing, reflecting all the costs of managing an offshore outsourcer. Even after proper pricing adjustments, the difference is still huge.
Second, the administrative costs at the newer firms are much lower. They've designed their processes from the start so that as much administrative work as possible is performed offshore. For example, at one company, when expense reports are submitted, they're immediately scanned into a computer system and then sent overseas electronically. The originals and the receipts are filed domestically, as required by the IRS, but the review, approval and reimbursement processes take place offshore.
Third, the management structure at the new outsourcers also costs less, since a high percentage of their managers are based in the same countries as their technical staffs. The price differential is even greater in the executive ranks.
In all three cases, lower wages mean lower costs, and the new firms are willing to pass a large percentage of these savings on to their customers. Historically, the big outsourcers have resisted going offshore for similar savings in order to protect revenues and profits. Forced to do so now, the question is how quickly they can adopt some of the newer entrants' approaches and use more offshore labor. But there are complications.
If the big outsourcers use cheaper offshore technical staffs, they will have to share the savings they reap with their customers to remain competitive. The resistance to doing so isn't merely greed but fear of affecting the stock price, since lower billing rates result in lower revenues and earnings. It takes a lot more business to get the same revenues when average domestic billing rates are six or seven times the going rate for offshore work.