September 15, 2003
(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.
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."
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."
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.
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.
"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?
BASE: Survey of 252 corporate IT managers in the U.S.; respondents were asked to select the three most important reasons.Reduce/control costs 44% 
Free up internal resources 20% Gain access to world-class capabilities 13% Increase revenue potential 13% Reduce time to market 11% Increase process efficiencies 11% Follow company philosophy of outsourcing noncore activities 11% Compensate for lack of appropriate skills 8%
Source: Computerworld and InterUnity Group Inc., Concord, Mass., April and May 2003
