Offshore outsourcing grows

The Atlanta Business Chronicle ^ | April 18, 2003 print edition | Anya Martin

[Willie Green]

For education and discussion only. Not for commercial use.

To trim costs last year, Alpharetta-based MAPICS outsourced approximately 80 percent of its major application coding and development to New Delhi, India-based HCL Technologies and formed a five-year partnership.

A year later, the money saved, an estimated 35 percent compared with handling the labor in-house, helped keep the firm profitable in a troubled economy and to facilitate its $30 million acquisition of competitor Frontstep Inc. (Nasdaq: FSTP) in January.

"It's just a good model for us; what it gives me is the flexibility to scale up or down depending on the product development projects over time," said Alan MacLamroc, chief technology executive for MAPICS Inc. (Nasdaq: MAPX), a manufacturing software services provider.

MAPICS is just one of a growing number of U.S. companies outsourcing IT development and software writing overseas to save money, and the trend is expected to grow, according to industry analysts.

The North American IT outsourcing market is projected to increase from $101 billion in 2000 to $160 billion in 2005, and 26 percent of firms already using offshore services plan to double their spending in this area within the next year, according to Gartner Dataquest.

Popular locations for IT outsourcing include India, Ireland, China, Singapore, the Philip-pines, Russia and South Africa.

This trend is similar to companies sending manufacturing overseas to take advantage of cheap labor and operating costs 25 years ago, said Martin Tilson, partner and chair of the technology practice in the Atlanta offices of law firm Kilpatrick Stockton LLP.

An increasing number of noncore services are also being exported to educated offshore work forces, including IT services, product and software development, call centers, human resources, bookkeeping and even entire financial departments, he said.

"We live in an electronic global marketplace where physical borders are less constraining, so once services are moved out and working properly, short of a cataclysmic war where borders are closed, they are probably not coming back," Tilson said.

Within the next 15 years, U.S. companies will send abroad an estimated 3.3 million U.S. service industry jobs, or $136 billion in U.S. wages, according to Forrester Research.

MAPICS' outsourcing to HCL Technologies Ltd. resulted in an approximately 12 percent staff reduction, and the company also underwent a restructuring last spring after the January 2002 deal, MacLamroc said.

Fortune 500 or Fortune 1000 firms have led the trend of offshore outsourcing, with small to midsized companies accounting for just 1 percent of all outsourcing.

That number is not expected to increase to more than 10 percent by 2005, according to Forrester.

Countries compete

The number of countries offering cheap IT labor is also in flux, with new players entering the market while more established ones mature, said Stan Anderson, managing partner at TechDiscovery LLC, an Atlanta-based software development outsourcing provider, which is considering bidding jointly with Indian firms for jobs.

"There's quite a bit of competition among developing shops in cities like Hyderabad and Banglor," he said. "They're now hiring from each other in much the way it was in Silicon Valley a few years ago."

However, if Indian IT salaries are driven up too significantly, cost advantages may diminish, with U.S. companies looking to other locales for talent, Anderson said.

For example, Israeli software firms, once a low-cost alternative, are now more likely to team with U.S. companies as equal players, said Tom Glazer, president of the American-Israeli Chamber of Commerce, Southeast region.

Not all overseas outsourcing experiences offer a happy ending, and companies should ensure that projects sent offshore are clearly defined in terms of goals and technical requirements, Anderson said.

"If you can't explain it to people thousands of miles away, you're not going to have a satisfactory outcome," he said.

MAPICS evaluated potential outsourcers rigorously, checking company references with other firms who had used them and carefully evaluating each contractor's network infrastructure, MacLamroc said.

Communication

A key factor to success is ongoing management and training, as well as ongoing daily communication with the vendor, made easy by videoconferencing advances, he said.

"We have online meetings where we may be projecting the actual application screens live and walking through a design review or an actual code review," MacLamroc said.

Although security might seem like it would be a bigger concern when sending work overseas in the current climate of terrorism, MacLamroc said he felt no more worries in this area than if a project was done domestically.

"Back when there was a lot of saber-rattling between Pakistan and India, we did fairly extensive what-if planning with the vendor in case things were to spiral out of hand," he said. "But I don't think there's any significant difference with security. There are just heightened security [risks] everywhere around the world right now."

Anya Martin is a contributing writer for Atlanta Business Chronicle. Reach her at atlantatechbiz@bizjournals.com.

[samuel_adams_us]

You will. Kind of the government killing the tobacco industry, guess what, the only thing they hurt was the economy.

[samuel_adams_us]

I guess no one here cares if the high tech industry all moves overseas? To bad we don't produce anything here in the states ourselves anymore so what will all 300 million of us do? Unemployment?

[1stFreedom]

>>With education thoroughly destroyed in this country, I do not blame you for not understanding the basic functioning of the economy.

A little condescending, no?

>>contrary, they are helping the economy: they provide goods and services at lower prices than otherwise.

No. Have you seen very many price drops around you? I sure haven't.

>>prices are lower; that helps millions of people.

The last I checked, prices have remaind constant.

>> The corporations are owned by people, including widows and orphans. Most Americans own corporations --- through pension plans at work if not their own savings.
>>WHen corporations improve bottom lines, millions of Americans pocket the money.

False. The money isn't pocketed as you claim. The value of one's portfolio may rise, but that's typically not pocketed. And unless you own a very large amount of stock or the stock quadruples, the increase you'll see will be slight.

For most people concerned with getting an income so as to pay the rent, the slight increase in the value of one's portfolios probably takes a back seat to a steady paycheck.

>>You should cut out this socialist anti-corporate crap that you have read in the papers and, apparently, believe.

Nobody is being anti-corporate IMO. I have my own corporation, mind you.

Rather, what you are seeing is people waking up and smelling the coffee. That's not socialistic my friend.

>> Today, most of them cannot get a job because they expect comparable money.

I agree with you here. IMO, for the most part, there were many holdouts last year waiting for a good paycheck. I do not think this is the case this year, however. People are looking for *anything*.

>>The jobs go oversees because our programmers are overpaid. That simple.

No, the programmers are not overpaid. The companies don't want to pay the market demand so they take the work to a cheaper market. None of the companies have complained that IT workers are overpaid.

The market dictates salaries here. In the 1990s, programmers may have been overpaid, but it was the MARKET which was responsible for this. So, now the market has adjusted and salaries are lower, which is fine. However, instead of tapping this cheaper market, the firms are tapping an even cheaper market.

The issue is not about overpaying. The issue really is what market the corporations are stabalizing: Ours or some foreign market?

[TopQuark]

Again, a common misunderstanding: you should compare to teh alternative, and alternative is not the past. Rather ir is something that did not happen. In this case, you have to compare the prices to what they would've been had out programmers did the job. The article tells you: the business saved about 1/3, which allowed it to win contracts. Had they had higher costs, they would've bid a higher prices for their services, and would not have secured revenue.

Has Microsoft lowered its OS and Program prices since it began paying slave wages in India? Don't think so. Yest they did: the margin of MS profits has declined. This means that, in comparison to costs, the prices charged for software rose less.

If the savings were indeed being passed on to the consumer They are also passed to your through your pension plan.

we would have had record massive deflation in the past 5-10 years in the cost of consumer items. Hasn't happened. WROng assumption. I am sorry too.

[TopQuark]

They are harming the economy, whose paying for all that unemployment? The Europeans?

Again, a bunch of commie propaganda. What "all that are unemployment?" Unemployment is very, very low. Check your statistics. Know the history of your country. And if you do not, don't repeat commie propaganda to us.

[A. Pole]

It is also because they have good education and a great apprenticeship program. Something lacking here.

This also come from solidarity and concern for common good. They do not push their kids into debt to get education and they promote skills as a matter of national policy.

[TopQuark]

guess what, the only thing they hurt was the economy.

'Cause you said so.

[FoxPro]

They'll interface directly with your superiors.

And yes, you are probably right. That’s actually happening slowly now. The trick is the relationships and communication. I am starting to make money doing this *now*. I am not going to pass up an opportunity because it may not be there in the future. I live in a real world and expect it to change from time to time. Its called progress, I will adapt.

BTW, the next industries to fall are the pornographic and Hollywood film industries. In fact I have always said in a few years all we will be doing is eating and watching each other having sex. That’s the way it looks like it is going. lol

[samuel_adams_us]

IT's all about filling the senators and CEO's pockets with money. Screw the working man.

[TopQuark]

A little condescending, no?

Not at all: I suffer from the inability to get proper education just like everyone else. Perhaps more, because I try to make up for it.

No need to assume the worst in others.

[jern]

let the Free market work. If US workers won't do it for "market value" send it somewhere that will.

[samuel_adams_us]

I am not a commie, we tax payers are paying the bill when people are not working. Next time you call someone a commie you ought to know who you are addressing, especially one whose family has lived in Virginia since 1607.

[TopQuark]

The last I checked, prices have remaind constant. Please see #104.

[samuel_adams_us]

I know, not because I said so, How many people will the bankruptcy of the tobacco industry put out of work? Have you ever thought about it?

[1stFreedom]

>>I am not a judge of people at all, but the cr-p you are peddling is an anti-capitalist garbage.

Whoa, here we have a problem. Capitalism is not the holy grail.

Capitalism is not supposed to be a religion, but you have all these fanatics running around spreading the Gospel of Capitalism.

Capitalism is a good, but not perfect, economic system. No economic system is perfect. Capitalism, IMO, is the best of the bunch, but like all systems, it has it's own problems.

I would choose capitalism over any other econimic system any day of the week. However, I would not choose a rigidly caplitalist system that has a policy that MONEY is more important then CITIZENS.

There is room for flexibility with capitalism. It's not a dogma nor religion.


>>A conservative should: (i) not have internalized it, (ii) be able to see socialist thought when others present it to him.

Here is another problem. CONSERVATISM is NOT infallible nor a perfect system of thought. It's not a religion. It should be like a pair of rose colored glasses either. Conservatism should not filter how you believe or what you accept.

My opinion on conservatism is this: it's principles are usually on pretty solid ground, but in some areas the gound is pretty soft.

Just like Capitalism, I feel that conservatism is the best of the philosophies. I also feel it has it's shortcomings.

Conservatives should learn to judge things via critical thinking, not judge things by what other conservatives say.

[Last Visible Dog]

This is NOT a new concept. The book, “The Decline and Fall of the American Programmer” (written in 1992) describes this very problem. I know of at least one company that stopped using Indian programmers because they were producing crap. A close friend of mind oversaw software development for a New York company that outsourced programming work to India - the language barrier and quality control issues made them rethink their move. Outsourcing is a big issue – but not the silver bullet many companies hope it would be. Meaning this could lead to unemployed programmers AND companies with screwed up products – a lose/lose situation.

[TopQuark]

Nobody is being anti-corporate IMO. I have my own corporation, mind you.

Oh, friend, so many wealthy people supported the Russian Revolution. Witness TEd Kennedy. Or even worse ---- TEd TURner.

You are not like they are: they know the difference and chose leftism actively, whereas you did not; it simply creeped into you from the rather socialist environment we have in the last forty years --- from education to newspapers to course you've taken in college.

But whether you do or do not have a corporation is irrelevant. AND besides, most Americans "have corporations."

[samuel_adams_us]

I know a company who has a UNIX operating system that is now maintained in India. Problem they have is that they don't get 24X7 help there, their customers here have to wait when they have a problem and because of that this company is losing market share.

[A. Pole]

Again, a bunch of commie propaganda. What "all that are unemployment?" Unemployment is very, very low.

Ha ha ha, he he he, hi hi hi. Thank you, I needed that.

Check your statistics.

There are lies, bigger lies and statistics. A person who "dropped out of labor market" is not counted. A person who got a job eight hours per week is employed.

Know the history of your country. And if you do not, don't repeat commie propaganda to us.

I grew up in a Communist country and I see that it is you who peddles propaganda. You are blinded by the free market fundamentalism exactly the same way Commies were blinded by the Soviet doctrine. If you lived in Eastern Europe before collapse of Berlin Wall you would have good job promising the brighter future under Communism.

[A. Pole]

There is room for flexibility with capitalism. It's not a dogma nor religion.

For some people it is!