Budget Woes Could Boost Government Offshoring

Political pressure may not keep outsourcing in check as state tax revenues plummet.

In 2005, the New Jersey legislature tried to put the brakes on IT offshoring by passing a law requiring that all state work be performed in the U.S. It was one of the most restrictive measures ever passed by a state. But try as it might, New Jersey couldn't escape the impact of globalization.

For instance, IT contracting firms that use H-1B workers are among those that bid for the state's IT work. Adel Ebeid, New Jersey's chief technology officer, believes that such contractors are able to offer competitive bids in part because they use H-1B workers who "are willing to settle for an hourly rate that would not be tolerated by other folks."

"I think the availability of H-1B visas is driving down hourly wages," he said.

New Jersey's offshore restrictions are atypical among state governments. Indeed, most states don't bar the offshoring of IT work but avoid it because of political pressure.

There are exceptions, though. Virginia, for instance, has signed contracts with offshore vendors for application development work. And some analysts believe that other states will be more receptive to offshore outsourcing as budget pressures increase.

New Jersey's offshoring law doesn't allow it to exclude people who are legally working in the U.S. The state awards contracts based on service and price, officials said.

The judiciary branch of the state's government last year awarded a services contract to Astir IT Solutions Inc., a South Plainfield, N.J.-based firm that received federal government approval for 160 H-1B visas between 2006 and 2008. Astir officials were not available for comment.

While the New Jersey Judiciary does use H-1B workers, it claims that it wouldn't offshore work under any circumstances. CIO Jim Rebo said that the court system's IT projects couldn't be run offshore even before the 2005 legislation for security reasons. "We have almost never contracted to do work off-site, let alone offshore," he said.

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Ebeid said workers with H-1B visas are particularly prevalent on application development jobs, and contractors on such projects may have rates of $65 to $70 per hour, which is less than the hourly rate generally paid to U.S. workers.

But can states resist outsourcing in the long run as they try to cut costs? Wipro Ltd., a Bangalore, India-based outsourcer, believes IT departments can save money using its remote infrastructure managed services.

The service, which is similar to ones offered by other outsourcers, generally includes the remote monitoring and management of most IT assets, including data centers, networks, security systems and application software. Typically, technology infrastructure outsourcers keep the data centers in the U.S., while the IT operations are mostly handled offshore.

GK Prasanna, senior vice president of technology infrastructure services at Wipro, estimates that such offerings can cut infrastructure costs by as much as 25% over the length of a five-to-seven-year contract.

Prasanna said that many Wipro customers "no longer feel uncomfortable" with outsourcing infrastructure services, though observers suggest that state governments may still be reluctant to embrace the model.

Gartner Inc. estimates that the remote infrastructure management services market, which now stands at about $17 billion worldwide, will grow by about 21% annually through 2012.

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