Outsourcing to offshoring
Wednesday, 24 December , 2003, 09:13
Outsourcing by the US is assuming massive proportions. The reason is "it saves money, time and frees in-house staff to do work central to the company's core mission." What is saved? Thirty-forty per cent, estimates the solutions group, Loud Cloud. Its CEO, Field Glass, says: "Anywhere from 10 per cent to 25 per cent of what they are spending on their labour contractors." Tom Turnstall, Senior Consulting Manager, KPMG, who researched on outsourcing deals in the 1990s, thinks it is difficult to quantify the savings. Usually firms with higher-than-average overheads or those that are relatively small outsource. Now, outsourcing is giving way to offshoring or setting up offices in outside locations to get their work done. India, favoured for outsourcing, is also the choice for offshoring. Will they undercut existing units?
So far 12 per cent of IT and 3 per cent of non-IT companies in the US have outsourced or shifted work; 22 per cent of this was by the big companies. Many more are heading the India way. Reflective of this is the surging exports of software and traditional and non-traditional products. Offshoring would raise exports just as much. Of longer-term significance are research facilities which 100 Fortune 500 companies are setting up with impressive results already in thrust areas.
Companies are thinking of increasing outsourcing apart besides setting up their own offices. According to consulting firm Gartner, such IT services as e-business, automation and manufacturing computer networks are set to grow at 29 per cent and business process outsourcing (BPO)of accounting, pay roll management, checking on insurance claims, engineering and web designs are set to grow at 68 per cent between 2002 and 2007 (both at CAGR - Compound Annual Growth Rate). Another firm, Forrester Research Group, estimates that 4,50,000 computer jobs will move to India in the next 12 years, which is 8 per cent of US' total jobs in the sector. IDC, yet another firm, in collaboration with Assocham, projects that BPO jobs can increase at 32 per cent (CAGR), from 0.15 million to 0.60 million. Finance wise, Gartner estimates India's BPO earnings to grow from $1.2 billion to $13.8 billion.
What is US companies' evaluation? Forrester Research surveyed 145 American companies: Eighty-eight per cent thought foreign firms give better value and 71 per cent felt offshore workers did quality work. That could over 15 years move, says Forrester analyst John McCarthy, 3.3 million jobs to India and other countries. The impact of this on the US economy is being hotly discussed. Gartner insists outsourcing will increase in spite of the contemplated legislation by US State governments. In the US, the new laws can be obviated by entrusting work to private parties which, in turn, outsource.
Addressing Computer Associates in Las Vegas, Henry Kissinger, the legendary Secretary of State of the Nixon era, was "scathing" in his remarks about Americans losing jobs. "Careful thought should be given to prevent this. May be through incentives. Can America can remain a great or a dominant power if it is primarily a service economy?" True, over 70 per cent of Americans are in the service sector but the 23-24 per cent engaged in manufacturing turn out quality goods. The US is the only country that has had a consistently high favourable technological balance of payments.
The US-India relations are on a high, though that did not prevent objections being raised to the 1,95,000 H1-B visas being given to Indians; they were scaled down to the previous 65,000. Also, professional bodies such as the Institute of Electrical and Electronic Engineers (with 2,35,000 members) have made representations to US Congressional Committees. However, the US President, George Bush, assured an Indian delegation that "he would seek to maintain a strong H1-B programme."
There are demands in Europe, though feeble, to block the entry of Indian professionals. British Telephone workers protested the transfer of facilities and jobs to India where the company is setting up two call centres. A compelling reason is the difference in wages. So, why is India preferred? And will it retain the present status? A Nasscom-Mc Kinsey's report highlights that if work is contracted to India there is a cost saving of 40-60 per cent, quality improvement of 3-8 per cent and productivity increase of 20-150 per cent.
India tops the list among the countries in the outsourcing arena. Global management consultancy firm A. T. Kearney evaluated the advantages of India's advantages by cost, environment and quality of people criteria. India is rated high for cost and the quality of personnel but slips badly in environment.
Competitors are moving up the ladder though Kearney believes India will be the first choice for some more time. A study of Kearney shows that nine out of 10 chief executives wanted to outsource to India.
Twenty-five per cent of the respondents wanted IT and auto component work to be given to India, 15 per cent favoured China and 13 per cent Mexico. India's well-educated, motivated and English-speaking workforce is the main factor that makes it the favourite.
India has some way to go in environment, especially infrastructure which needs to be upgraded. As regards labour, where India scores over most countries, China poses a threat. Rita Terdiman, Research Director, Gartner, holds that new service providers have broken the stranglehold of India.
Microsoft plans to recruit 4,000 in the US but only 1,000 in India, which lays bare American fears. Unlike Microsoft other firms have not indicated relative recruiting plans. A substantial number of non-US students are obtaining degrees in different fields including IT. Is there a shortage of professionals in the US? What does it imply for outsourcing or offshoring by the bigger companies? Will foreign students who come for studies stay on in the US or go back because of offshoring? How does Microsoft's injunction fit into this?
Britain's Minister of Trade admitted a shortage of skills in the UK and Europe. That makes it advantageous to outsource work to India, more so because the British are familiar with India. Sixty per cent of UK info-tech permits have been given to Indians and that will happen with Germany also, despite competitors in Europe.
Contrary to the apprehension that outsourcing of work to India by the US is detrimental to the latter's interests, a Mckinsey study shows the parent company retains equity control. Including IBM, Hewlett Packard, Oracle, Accenture, and Microsoft, 12 companies have made acquisitions in India involving $3,858 million. Look at the economics: For every dollar of investment, $1.45-1.47 value is created. Of this, the US receives $1.12-1.14. India only 33 cents. American investors and customers get 58 cents and exporters 5 cents. Those laid off can work in the newer investments made from profits. The frontiers of technology are widening, so also job opportunities. Mckinsey's study shows how offshoring is beneficial. Will offshoring displace outsourcing and by how much?
Keeping the trade-offs in view, the Information Technology Association of America (ITAA) justified outsourcing and offshoring. The Association argued that the IT industry being global the US should keep in view the changing market conditions and customer expectations. Ignore them, and the country's "long term competitiveness suffers." IT companies get 50 per cent or more of their total revenues from overseas markets "for meeting the needs of overseas customers, off shore product development may be required to preserve adequate localisation".
For the same reason, ITAA and its President, Harris Miller, are against "undue restrictions on the issue of visas." The Association criticised the political class for fuelling feelings against outsourcing and offshoring. It clearly felt the four US States contemplating legislation and those advocating restrictions on visas should review their thinking.
At the same time ITAA is all for improving educational and teaching standards within the US. Where different countries are trying to out do each other, the basic solution lies in the free movement of capital and personnel. Of importance from India's point is not the setting of more educational institutions but of emphasis on the quality of teaching and training. They have to go up the value chain to retain their present advantage. Indians have to learn new programming techniques and also languages such as German, Japanese, Chinese and so on.
Viewing 2003: Outsourcing... and India
December 23 2003
by Andy McCue
Strikes, jobs to India, mixed fortunes for the suppliers...
It was one of the most exciting and controversial areas in business and technology this past year but, asks Andy McCue, where does the future of outsourcing and IT services in general lie?
While the rest of the IT industry has still largely been in the doldrums for 2003, the continued need for businesses to look at ways of slashing IT costs has seen a relative boom in the demand for outsourcing services.
India has dominated the headlines with the massive shift towards low-cost offshore deals both for call centres and development work and, along with many of the big traditional IT outsourcing deals, it has attracted the attention of the unions and brought with it the threat of strikes by IT staff.
BT was the first to run into problems in February with the Communication Workers Union threatening strike action over plans to shift hundreds of directory enquiry jobs to India
In what turned out to be a much bigger dispute, Bank of Ireland IT staff faced off with bank bosses over a $600m outsourcing deal with Hewlett Packard that involved the transfer of 500 employees to the supplier. The bank announced the deal in April but then spent several months negotiating with the union, which warned that the firm faced "total war" with staff if they voted for a strike. Strike action was eventually averted and agreement reached in September.
It wasn't just the private sector coming under union pressure. The Department for Environment, Food and Rural Affairs (Defra) started tendering for a 10-year £850m IT contract to overhaul the way the department works but the union is bitterly opposed to the deal and is warning of another potential government IT disaster.
Possibly the success story of the year was the blossoming of India as a mainstream low-cost base for blue-chip companies to outsource both customer facing and back-office IT.
In April, analyst firm Gartner said the pace at which companies are transferring IT services to offshore contractors is speeding up with predicted growth rates of 40 per cent this year. India, it said, still dominates the offshore sector with 90 per cent of the market, although 2003 saw the tentative emergence of several other countries.
Along with more established alternatives such as South Africa and China, some analysts suggested Eastern Europe could provide the same services as India for lower costs and with fewer cultural differences. Pete Foster, analyst at Pierre Audoin Consultants, said in a report in September that Indian costs will rise as demand starts to outstrips supply.
Despite that many companies decided India was the place for them and 2003 saw major offshore outsourcing deals with Barclays close to signing a deal with Accenture that could see hundreds of software development jobs going to India, Norwich Union revealing plans to move 2,500 jobs abroad, and Xansa and Thames Water signing a business process outsourcing deal based in India.
As more deals were signed and stories emerged about Indian call centre agents drilled by former UK teachers on regional accents and the latest plotlines in Coronation Street the spectre of thousands of British jobs being moved to India inevitably attracted something of a backlash in certain quarters. In August, MPs revealed plans to examine the impact of offshore outsourcing on the UK technology industry while the unions pushed the EU for a more in-depth investigation. One analyst controversially suggested that firms who offshored UK jobs to places like India will face a customer backlash, with consumers choosing to buy from companies that make of point of being 'British and proud of it'.
The year also proved to be a year of mixed fortunes for the major vendors in the outsourcing market. While IBM started the year with a $5bn deal with JP Morgan Chase and a $1bn deal with insurance group Axa, it will probably be glad to see the back of 2003 after missing out on several major contracts in the UK. It missed out three times at Barclays in 2003, first to run the bank's own IT department, then to EDS in a $350m desktop services deal and finally in December to Accenture for a £450m application development contract.
IBM then had its £1.8bn deal with Cable & Wireless scrapped five years early as the telco battled to restructure and cut costs, while it missed out in the bidding for major public sector contracts at the Ministry of Defence and the NHS. That said, IBM still topped a brand perception study among 200 IT services buyers, supporting the old adage that "no-one ever got fired for buying IBM".
Major rival EDS has also had a year it would probably rather forget, culminating in the stunning, but not altogether surprising, decision by the Inland Revenue to ditch the firm for its 10-year £3bn IT services contract in favour of Cap Gemini Ernst & Young (CGEY).
2003 proved to be a rather better year for CSC, CGEY, Accenture and BT – which burst onto the services scene with renewed vigour with BT Retail CEO Pierre Danon boldly proclaiming: "It's not stupid for a customer to think we can run their infrastructure." And despite an early setback in losing out on the Inland Revenue contract, BT was part of the CSC consortium that bagged the Royal Mail's £1.5bn mega-deal, and it remains in the running for the MoD's £4bn IT contract that is due to be awarded next year. HP also made up some ground on the leading players with big contracts such as the Bank of Ireland.
The outlook for 2004 remains rosy for the outsourcing sector, relative to that of the rest of the IT industry, largely on the back of the public sector and, increasingly, the financial services sector. Analyst Ovum Holway predicts a £7bn public sector "bonanza" by 2006, with the government software and services market growing 30 times faster than the private sector. Meanwhile, analyst Datamonitor predicts European banks will spend over $12bn on IT outsourcing services by 2005 on the back of fast growth in business process outsourcing – a market that was worth £3.5bn in 2001 and is predicted to be worth over £10bn in 2005.
As for 2004, it looks like outsourcing will again be hitting the headlines. Vendors are reporting that average deal sizes are getting smaller but there's still plenty of contracts in the pipeline, from the MoD's £4bn tender or the Beeb's plans to flog its BBC Technology subsidiary in a potential £2bn deal. That aside the year has very much ended as it started, with the news that IT staff at Bradford council are to vote on strike action because they don't want to be transferred to the private sector. Which is why 14 years after Kodak Eastman made the groundbreaking move to outsource its entire IT department, the services sector continues to be one of the most exciting in the technology industry.
Source : http://www.silicon.com/management/itdirect...39117490,00.htm