What does the fact that the California legislature three times approved bills to constrain offshore outsourcing tell you? Expect more bills like those in California to be filed across the country, as rank-and-file IT workers refuse to join the economic cognoscenti in hailing offshore outsourcing as the savior of the U.S. economy in the era of globalization.
Among consulting firms, McKinsey & Company has routinely positioned itself on the front lines of the offshoring debate. The economic case, as made by director of McKinsey Global Institute Diana Farrell, is that offshore outsourcing is a win-win game for U.S. business. It frees up resources that can be used to generate high value. Any lost jobs, she contends, have to be viewed as part of the overall flow of economic activity. Those jobs, presumably, will be more than replaced by new jobs that result when companies invest their savings from offshore outsourcing in new initiatives.
At least that's the theory — and maybe it actually works that way, sort of. Take Sapient, the Cambridge, MA–based consulting firm that has fought its way back into a growth mode after several painfully slow years. It hired 223 people in one quarter alone last year, according to co-CEO Jerry Greenberg. But like the punch line of a good-news/bad-news joke, half of those hires were in India.
Still, Greenberg is bullish on the long-term prospects for IT in the U.S. "It's my belief that what's going to happen is that as the economy improves, which it has been doing, there will be a shortage of IT professionals in the U.S., as there will be in many other countries, and rather than focus on job loss, people will be quite happy that companies that rely on technology for competitive advantage have ways to get that technology designed and deployed," he told Consulting Magazine in a recent interview.
Well, maybe eventually, but what we are experiencing right now is the use of offshore labor simply to drive down the cost of IT projects, with consulting firms playing a pivotal role. "What you're seeing is a global game of labor arbitrage," says Terry Jost, vice president of North American outsourcing services for Capgemini, Dallas. In this game, the IT consulting firms try to capitalize on the differences in wages paid to programmers in different locales much like financial arbitragers take advantage of differences in stock prices.
IT consulting firms from India have long capitalized on the cheap availability of good programmers to grab a chunk of the U.S. IT consulting services business. While U.S.-based companies continue to lead the worldwide IT services market with 59 percent of total spending in 2003, India-based vendors have begun to make a significant impact, according to Gartner, Inc. Although they represented a small segment of the worldwide market, 1.4 percent, in 2003 their revenues collectively increased 29 percent, compared with only 4 percent growth among U.S.-based vendors. And they are pulling most of that business, 92 percent, from outside India. When the 2004 figures come in, you can expect that the Indian consulting firms will have grabbed an even bigger slice of the IT consulting pie. Clearly, U.S.-based IT services providers need a low-cost option to counter the inroads Indian firms are making.
Low price, it seems, overcomes all objections. "Clients are now much more comfortable with work being done offshore," reports Brad Smith, vice president of research at Kennedy Information, Peterborough, NH. That comfort stems primarily from the substantially lower costs. How much lower? "The cost can be as little as one-third the cost here," Smith reports. Programmers who cost $150 per hour in the U.S. cost about $45 to $50 per hour in India.
A study by Deloitte Research, part of Deloitte & Touche, confirms strong client interest. The researchers found that financial institutions from North America and Europe increased their volume of offshore jobs 400 percent from 2003 to 2004. The Deloitte study also forecasts that by 2010, offshore business process outsourcing will capture more than 20 percent of the financial industry's global cost base, resulting in an average savings of 37 percent per relocated process.
The rush to offshore outsourcing appears unstoppable despite a flurry of legislative counterproposals and lobbying and picketing by laid-off IT workers. In a recent report, Meta Group predicted that offshore outsourcing would grow 20 percent annually through 2008 despite any political backlash. By then, the researchers estimate that companies will outsource 60 percent of their application work offshore. Any political carping will run smack into the economic reality that offshore outsourcing is a key way to reduce IT spending and improve the overall corporate bottom line.
For U.S. IT consulting firms, the rush to open offshore facilities has emerged as a competitive survival strategy. "I can pursue larger deals because I have this capability," says Craig Franklin, executive vice president, BearingPoint. The consulting firm operates two development centers in China, one in India, and one in Spain.
"If there's work that can be done offshore more cost effectively, then you've got to do it, and it's being driven out of competitive necessity," said Brian Keane, CEO, Keane Inc., in a recent interview with Consulting Magazine. The firm expanded its offshore capabilities in India in November. The new facility expands the consulting firm's existing Advanced Development Center (ADC) at Cyber Towers in Hitec City, India. Keane now has Indian ADCs in Gurgaon, Noida, and Hyderabad. It also operates ADCs in Halifax and Toronto.
Offshore survival does not come cheaply. Said Sapient's Greenberg in an interview with Consulting Magazine: "When we pushed into India hard, we knew that it was going to accelerate the losses that we were posting. … We told people, 'Here's what's going to happen. Here's how much money we're going to lose.'" The company did experience losses, but has since bounced back across the board. Although the economic advantages of offshore IT seem overwhelming — "If something onshore costs $100, we can get it in China for $20," says BearingPoint's Franklin — the savings don't drop entirely to the bottom line. "You need a more structured, documented process. You will put more time and effort into communications. You will also need more people dedicated to coordinating the effort," he explains. All these things add to the cost of the offshore operation. Still, "the economic benefit is compelling," he adds.
Capgemini also is counting on outsourcing to reduce costs. "Most U.S. companies are scrutinizing their IT spending and now want to reduce overall IT expense," says Terry Jost, vice president of North American outsourcing services for Capgemini. Through offshore outsourcing, companies can save as much as 25 percent on application maintenance and as much as 55 percent on application development projects, he reports.
Not every offshore venture is successful. Dell probably suffered the most high-profile failure when it yanked its support for corporate customers from a call center in India — although it continues to provide consumer support through India. Similarly, Lehman Brothers reportedly stopped using Widpro in India for its internal IT help desk. However, Lehman continues to use both Widpro and Tata for other things.
Business process outsourcing (BPO) may yet prove to be the most lucrative service delivered by the consulting firms' offshore facilities. A 2003 Gartner survey of 301 U.S. clients of BPO showed that 16 percent of those companies were currently outsourcing BPO services offshore, and that 17 percent were considering outsourcing processes offshore within the next two years. Processes most likely to be outsourced offshore are contact centers, including voice, e-mail, and chat, and back-office transaction processing services.
Gartner expects offshore business process outsourcing to reach $3 billion in 2004, better than doubling the $1.3 billion in 2003. At the 2004 level, offshore BPO is expected to represent 2.3 percent of the total BPO market. The big growth for offshore BPO, however, is not expected to kick in until after 2007. At that point, service delivery will have matured, and the users and service providers will have overcome the various operational, cultural, and sociopolitical issues around offshore BPO, according to Gartner. Eventually, Capgemini expects offshore BPO to embrace finance and accounting, supply chain, procurement, CRM, settlement processing, and HR processes, says Jost.
Keane, too, sees BPO as a model for blending onshore and offshore services. As he told Consulting Magazine, "There is other, more high-end work that you simply can't do offshore, and the classic example is the whole BPO space where we're spending a considerable part of those engagements in optimizing the business processes. The initial enterprise BPO blueprint and then the process re-engineering are all being done locally. And then downstream we [will] look to outsource some of the business processes that can be done offshore."
However, just as the U.S.-based firms are moving into turf staked out by the offshore services providers, those companies are preparing to climb up the IT consulting food chain. Already, reports have begun circulating of pure-play offshore firms like InfoSys offering seven-figure salaries to attract talent from the best U.S.-based firms. U.S. consulting firms should prepare to confront their Indian rivals here, too.
The movement of IT services offshore is a done deal. Occasional horror stories of projects gone bad, concerns about data protection, and posturing by populist politicians won't change a thing. The economics are irrefutable. For U.S.-based consulting firms, the options are to partner with an offshore provider or set up their own offshore operations. And then brace themselves for new competition hitting U.S. shores.
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