IT Services Are Moving Offshore, but Is the World Ready?

Recent data out of McKinsey & Co. reveals that offshore outsourcing providers have only captured 10 percent of a potential US$300 billion business. One opportunity for new growth is IT services. Business processes outsourcing will continue along the curve it has established, but McKinsey predicts IT services will be offshored in greater numbers.

Some U.S. companies have pre-empted this trend by creating their own offshore IT services divisions. Amazon, for example, has a Bangalore, India, office of technology builders and innovators.

India Still Popular

Software engineers, researchers, and product developers seek to solve complex problems in large-scale computing such as clustered storage, data and text mining, and machine learning, in which computer systems improve their performance based on experience.

Amazon Development Center India also works on Amazon.com features for sites around the world, innovative search technologies and scalable Web services for software developers.

However, other organizations want to offshore some of their IT work without breaking ground on foreign turf, erecting a building and hiring staff.

“Companies are finally grasping the fact that IT is rarely a core competency, and as windows of opportunity become smaller, here is a need for greater flexibility in the infrastructure to support the business,” said Clive Longbottom, service director of business process analysis at Quocirca, a company that researches the impact emerging and evolving technologies have on business.

“Certainly, the increasing move to service-oriented architectures and software as a service make outsourcing far more valid. And provided that latency issues can be managed, location is not an issue at all as to where these functional components are hosted and managed,” Longbottom added.

The Philippines and India are the primary destinations for U.S. applications development, platform maintenance, network administration and help desk services, he told CRM Buyer.

Benefits Offset by Inefficiencies, Lack of Leadership

“Of the clients we’ve worked with, Sony Pictures Entertainment, Scripps Networks and CanWest MediaWorks use outsourced services from India. Not surprisingly, these are the three largest firms on our client list,” said George Song, founding partner of 55 Minutes, a Web application design and development company in Albany, Calif.

“There’s always at least a component which happens in North America,” Song continued. In CanWest’s case, the model is for a team of people to come from India for a number of months. Supposedly once they understand the project, they can go back to India and disseminate that information to a bigger project team, so the advantage of a lot of bodies is gained.”

However, Song says he hasn’t seen the advantage of offshore outsourcing yet. “Pros? Honestly I cannot see any from the projects I’ve seen. They have all been ineffective to disastrous,” he confessed to CRM Buyer.

“I find most of the people from India are not capable of communicating in the North American business style. A lot of nuances are lost during meetings, and [Indian workers] are often very reluctant to ask questions.” Problems don’t surface early enough, and Indian employees play rigidly defined roles, making them cogs in equally inflexible processes, Song noted.

“These firms rely on dependable, repeatable processes. Solutions must be inside the box. This simply doesn’t work in today’s development environment,” he added. “If a developer is not creative, she cannot produce good code, period.” To get around this rote functionality, “you often need three or four people to do the job of one multi-skilled but more expensive person.”

Cost savings isn’t the only reason companies outsource. As Longbottom noted, IT services move outside organizations because they are not core competencies.

“Oftentimes companies turn outside for problems that are hard to solve or they would have solved it themselves,” agreed Song. Nevertheless, he said he has not seen any leadership capabilities from big offshore firms. Instead, they expect their clients to uncover solutions.

That’s why Longbottom suggested there’s only one reason for offshore outsourcing: because the company will do better because of it.

“Think out the extras behind offshoring — the need for additional quality assurance, the time-zone issues, the need for cultural education, the need to educate the people involved in what they are doing and its impact on your business,” he said.

“The quality factor cannot be ignored,” Song added. “The cost of fixing or redoing something is huge.”

Seeing a Brighter Future

neoIT’s clients seek advice on locating their IT functions for the greatest cost-efficiency, but also practical accessibility to staff charged with hardware, software and network projects; regulatory compliance and quality outcomes. “If these were easy decisions to make, they wouldn’t come to us,” Bryan Mekechuk, managing director of the independent global sourcing advisory firm, told CRM Buyer.

“One of the pros of offshore outsourcing is reducing the overall cost of doing business,” he said. “What you have to do is make sure you consider all of the elements.” If face-to-face meetings, limited co-location of an American company’s staff with foreign workers or travel for project managers between the locations is required, near-shore offshoring to Canada, Mexico or Latin America may be a better option than the Philippines or India.

“In India, the cost advantage is being eroded because of significant turnover of employees and climbing wages,” he added.

Mekechuk offers the following advice to companies considering outsourcing their IT development and administration:

• Establish your objectives.
• Perform due diligence on prospective service providers.
• Define ongoing governance with the service provider, including provisions for daily communication and decision making.
• Plan for scalability.

“The key success indicators should be increased revenues, increased customer satisfaction, improved time to market, greater market flexibility, and if it can be done cheaper, then great!” said Longbottom.