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.

[snopercod]

Anyone know of any companies wanting to hire a GREAT employee?

It doesn't matter how great you are if you're over 40. Have you not noticed how many "old folks" are working at fast food restraunts these days? People just like you...

Just trying to cheer you up...

[1stFreedom]

"They'll have to pry my gun from my cold dead hands"

[AppyPappy]

"They'll have to pry my gun from my cold dead hands"

If you give money to the Dems, you may as well hand them over.

[1stFreedom]

The good old days of tax loopholes for corporations are gone.

However, there are plenty of deductions that basically whittle down a corporations taxable income.

That doesn't mean they don't pay taxes. It means they pay small amounts of taxes.

For instance, equipment purchased can be depreciated, which is deductible. I believe that this year $25,000 worth of equipment can be written off entirely.

Everybody should have their own corporation to take advantage of such deductions.

[snopercod]

I have an idea.

Let's develop a vaccination for SARS and sell it to the Chinese for $100 a dose. $10 of that would go to the company that developed the vaccine. The rest would go into a venture capital fund to make loans to American small businesses with viable ideas.

That way we can recoup some of the manufacturing money our country has lost over the last ten years.

[1stFreedom]

Know what? I have to sell my guns to pay the rent. Also, I don't have an SUV. If I did, it would probably be repoed.

And, yes I did save for a rainy day. Problem is those savings are gone.

[Beck_isright]

"The good old days of tax loopholes for corporations are gone."

Since when did corporations pay taxes?

"However, there are plenty of deductions that basically whittle down a corporations taxable income."

A totally incorrect statement. There are plenty of deductions which increase the profit margin of a company. You see, the taxes are already calculated into the cost of the good or service provided. So the less the government receives thanks to "loopholes" or "deductions" the higher the per unit/activity profit.

"Everybody should have their own corporation to take advantage of such deductions."

Absolutely. It's the American way.

[Beck_isright]

Actually the profit margin in the pharmaceutical industry (last time I did a job for them) was still hovering around 84.7%. Of course I'm sure all the new regs have bitten into that, but if I could earn 80 cents on every dollar I sold, I would do it in a heartbeat.

[1stFreedom]

>>Correct, they'll inflate their pockets with astronomical salaries... Joe consumer sees only a tiny benifit in cost reduction from the outsourcing of labor; while the CEO making the decision to ship your job overseas gets a multimillion dollar raise.

Most fortune 500 companies use market data to compensate their executives. There are compensation ceilings and the executives DO NOT get compensated in any form beyond those limits. So, no, the CEO is not going to get a million dollar raise from these savings.

Also, most CEO's do not get millions of dollars in cash. Most of their high pay is in the form of stock options. Their salary is typically $200-$600k.

I've worked in Human Resources and with executive/CEO compensation and I've seen how it works.

[1stFreedom]

No. They learned their lesson. Only some want to take them away now. Only the die hards.

And, even if they did want to, they couldn't if they wanted to. Don't know I have them, don't know who I am, don't know where I live, and, I can always hide them.

Plus, I'll NEVER register them.

[Poohbah]

It all depends -- if the guy from Boston was a recent product of our public school system, I might think twice.

Management has two choices:

1. Pay $1,000,000 to get buggy, unreliable code from Americans.

2. Outsource to India. Get equally buggy and equally unreliable code. Pay $650,000.

Now, which one would YOU pick?

[1stFreedom]

"The good old days of tax loopholes for corporations are gone."

Since when did corporations pay taxes?

Corporations have paid taxes for eons. What typically happens is things are planned so as to pay little or no taxes. However, most corporations pay *some* level of taxes. It might not be significant, but it's still paid.

"However, there are plenty of deductions that basically whittle down a corporations taxable income."

No, a totally correct statement. I own a business, I know about it. What happens is you have income and you plan your speding around how to best reduce the potential tax. The goal is to reduce your profit, since corporeate profits are what are taxed. Deductions reduce your taxable profit.

As far as produced goods go, you can write off the cost of goods sold through deductions. Throw in depreciation of the equipment to produce the products, rents, payroll, and so forth and you have a massive reduction in the taxable profit. What gets taxed is the remaing profit -- and if you have planned carefully, it isn't much.



"Everybody should have their own corporation to take advantage of such deductions."

Absolutely. It's the American way.

[RockChucker]

[/i]"This is why it's pointless to pursue a career in I.T. It isn't that these companys can't find Americans with the talent to do the work, it's that Americans aren't willing to go through the time and expense, not to mention the stress of keeping up with the latest technology, only to be told they're overpaid and their job is being outsourced. After 15 years I'm done with this field."[/i]

My last position was Sr. Systems Analyst for Siemens. I have now been unemployed for 3 months. Before this job, I was unemployed for an 8 month stretch. I cut and delivered fire wood, did construction and taught at a private college to make ends meet.

I am now finished with the IT industry. I have my contractors license and will be starting work in a week (at 1/4th of my prior pay), but I am not counting on this exclusively.

For all you people out there with jobs, I advise you have at least 2 side "businesses" to back you up.

For instance, even if you have a great job with lots of money, try getting into the Farmers Market scene. Buy bulk pruce from local farmers (Amish are great sources, if available) and resell at the market. You won't get rich, but it's a fun way to spend the saturday. If you have kids, they will love it. They could help with cookies, beads, etc...

Also, controlling spending now and saving money is a lot easier when you have a job. Making the changes after you loose your employment is a lot more difficult.

For years now, we have only bought our clothes from Goodwill. We also have been growing about 10% of our food and about 25% of our meat is wild game shot on our property. We did the chicken thing (up to 45 egg layers, at one time), but found that we can purchase eggs from the store for less than the cost of chicken feed. Not to mention the extra work. Also, egg layers don't have good meat and I don't like picking feathers from warm, freshly dead birds.

I could go on and on, but basically my advice is to prepare now before the axe falls.

By the way, I don't blame Republicans or business for outscourceing. If it's cheaper, what can one do? Adapt and move on.

[PuNcH]

It's only ruined when idiots decide that they need the government to manipulate the system for political purposes.

Now all you have to do is realize, that is the world we live in. The is NO FREE TRADE. No other country is conducting FREE TRADE with the US.

You people are delusional. Our world is composed of a bunch of different societies. Everyone of those societies is taken far more seriously than American is taking itself right now. Mix half-assed free tade libertarianism with socialism and you get....socialism.

Maybe you "free traders" could be taken more seriously when you can acknowledge that we live in a seperate society whether we like it or not.

[TopQuark]

I agree with the thrust of your remark would like to address some details, if I may.

I point out that it's our education system that is to blame. The problem is even worse: our education system reflects our values. It is not that someone invaded our country and installed this terrible system: we ourselves destroyed liberal education in 1950s. Next, in the 1960s-70s, when good grades became a ticket out of Vietnam, a grade inflation has occurred (professors gave failing students a passing grade not wanting to have a potential death "on their conscience" -- an unearned guilt). Finally, the self-esteem has replaced high standards in schools, which propagated also into higher education. You are right: how can someone discover in college the beauty of mathematics or even bow to its importance? It's too late.

At some point, we as a nation decided that an MBA is worth more than an Engineering degree....

It is not the nation --- it is the labor market that decided that. And the pay is higher because the supply is insufficient.

Having emphasized specialization since the dawn of the Industrial REvolution, as exemplified by Henry Ford, the economy reached the opposite phase, where integrative abilities are required. Of a sudden, with the need clearly there, there were vfew people available to fill it. That is why the MBAs are paid a lot.

Note also that the same happens within engineering, which now includes also software engineering. Any semi-idiot with a bit of training could make over $100,000 a year all through the 1990s just by programming. In contrast, a Ph.D. in MEchanical engineering with 20 years of experience had an everage salary of $94,000 (maybe 96,000, I don't remember exactly). I am trying to point out that, in constrast to Marx's theory, education and training is not necessarily an indicator of value (nor should it be): the market sets its price.

WE are witnessing a deflation of salaries in programming; there will be a similar deflation for MBAs. When? No one knows, of course.

They want an MBA, and a "rich" lifestyle without having to learn that geekie stuff.

That has nothing to do with the MBAs. WHat you point out is true, but only recently.

At Carnegie Mellon University, as recently as 1980s, MBA Students had to write research papers. Calculus was required in any accredited school. Faculty at Harvard would announce to the class during the first lecture, "Five percent of you will fail this course."

All this has changed as part of the general dumbing down of our nation. It's just engineering is more resistance: it's very hard to build more than one bridge in your career without calculus: after the first falls down, you are unlikely to have a second chance.

[TopQuark]

Last year when India and Pakistan were on the edge, and India was about to destroy Pakistan, guess who stopped the war? Bush and Co. Nope, it was Bill Gates and the CEO of GE. That's interesting; I missed that entirely. Thanks for letting us know.

Thank you also for your kind words regarding my comments. I too enjoy reading yours.

[Beck_isright]

Myth#1. " Corporations have paid taxes for eons."

Corporations collect taxes on behalf of the government. The income and other taxes placed on business are passed on to the consumer. Any business which does not price that into their product or service is doomed to failure.

Myth#2."However, most corporations pay *some* level of taxes. It might not be significant, but it's still paid."

It is very significant but it is a tax on the customers of the business. The corporation is the tax man on the products and services on behalf of the government.

"I own a business, I know about it."

Then you process paperwork for the government but you do not take the monies out of your pocket to pay the taxes do you? I own a business also. My fees include a 40% plus bump over my desired profit margin to cover all fees and taxes I incur while operating my enterprise. If there was not a "tax" (I prefer the phrase "paperwork processing fee for the IRS")on my corporation, I could charge 40% less for my services and be even more competitive internationally.

"What happens is you have income and you plan your speding(sic) around how to best reduce the potential tax."

You might, I do not. I have profit margins which I plan for and maintain and any tax benefits I can find increase those margins. My fees are padded to prevent any loss of "income" by maintaining a profit margin that I can enjoy. It is the same for any corporation.

" The goal is to reduce your profit, since corporeate profits are what are taxed. Deductions reduce your taxable profit."

??????????? No, the goal is to plan your profit margin so that after you've finished your collection duties for the IRS, you have a margin which justifies staying in business. If your goal is to reduce your profit because of the tax code, you really do not need to be in business. Deductions increase your profit if managed properly. I seriously doubt that GM or GE look to reduce profits for the purpose of reducing tax liability. I worked with Pfizer and Eli Lilly years ago as a consultant and we focused on profit maximizing formulas, not planning our business around the tax code.

Myth#3." What gets taxed is the remaing profit -- and if you have planned carefully, it isn't much."

The tax you pay is what you planned your business to collect on behalf of the IRS. If you don't plan your profitability, you won't make one.

Please, think about it. The cost of goods and services would be greatly reduced with the elimination of the current tax code. The Russians of all people, figured this out before our cotton cahoned politicians in D.C. I hope we elect some smarter morons to figure out the same and quick.

[Beck_isright]

Who said the US was conducting "free trade"???? I never made that claim in any of my threads, so please, be more accurate. I push free market economics and there is a huge difference.

The US does not and never will conduct 100% pure "FREE TRADE".

" You people are delusional."

Prove it. You can not even quote my other posts accurately. I maintain that free market economics needs to be allowed to flourish within our borders. Since we do not have that, we have quasi-socialism slanting more towards Euro-socialism, we can not expand nor teach free market economics to other "societies" in an efficient manner.

"Our world is composed of a bunch of different societies. "

I never noticed that when I was in the UK, Ireland, Germany, Poland, Turkey, Iraq, Kuwait, Saudi Arabia, Bahrain, Mexico, Canada, or South Korea. Thank you for pointing that out to me. </sarcasm off

"Everyone of those societies is taken far more seriously than American is taking itself right now."

You need to spend some time in Mexico. They desire to be more like the US than deal with their corrupt government. Despite all of our flaws, we are the number one most desired nation to copy, and we are taken quite seriously.

"Mix half-assed free tade libertarianism with socialism and you get....socialism."

Since all we have now is an autocracy with socialism we have socialism. I would suggest you check your methodology for creating something in a statement which does not exist. We do not have "half-assed free trade libertarianism". We have government regulated internationalism which is quasi-socialism.

"Maybe you "free traders" could be taken more seriously when you can acknowledge that we live in a seperate society whether we like it or not."

Once again, I ask, where is the phrase "free trade" or "free trader" used in my prior posts. There is a major difference between the advocation of free market economics and free trade. Neither exist now, nor will they in my lifetime.

[Beck_isright]

Isn't it sad though, when you deal with the poor quality of MBA grads. I wouldn't hire a lot of these clowns to manage a dog walking service for me.

[1stFreedom]

>>Corporations collect taxes on behalf of the government.

No, they don't. While taxes are figured into the fees charged for services and products, corporations don't send you a tax bill. If a coporation doesn't pay it's taxes, it's assests, not the consumer or customers assets.

Myth#2."However, most corporations pay *some* level of taxes. It might not be significant, but it's still paid."

>>It is very significant but it is a tax on the customers of the business.

Indirectly in the sense that the corp doesn't send tax bills or require customers to fill out returns. It is directly passed on in the sense that it is part of the markup.

>>The corporation is the tax man on the products and services on behalf of the government.

No, not at all. Like I said, the corp does not require customers to fill out returns.

>>Then you process paperwork for the government but you do not take the monies out of your pocket to pay the taxes do you?

The money does come out of my pocket. If the govt didn't tax the business, I'd spend it. So, yea, the monies are mine through the entity of my business.

>>I could charge 40% less for my services and be even more competitive internationally.

Ok. Say you charge $150 an hour for your services. The market rate is $150. You company is a personal services corp, and you get hit with a 39% tax rate off the bat. But other companies which do not meet the "personal services" definition or do not claim such, have a lower tax rate. Now, they are not going to drop their rates to reflect their lower taxes. So the lack of a tax or lower taxes will not spur rate reductions. You'd be a fool if you drop your rates due to lower taxes (well, at least in good times.) People do not give up money if they don't have to.

>>You might, I do not.

Well, some have the opinion that we shouldn't live our lives around planning for taxes. Which is better? I don't know to be honest. There are benefits to operating both ways.

>>" The goal is to reduce your profit, since corporeate profits are what are taxed. Deductions reduce your taxable profit."

>>No, the goal is to plan your profit margin so that after you've finished your collection duties for the IRS, you have a margin which justifies staying in business.

No, not at all. Corporations spend billions of dollars employing the likes of Author Anderson so as to reduce taxation. Part of planning is to maximize deductions that eat away at *taxable* profit.

Myth#3." What gets taxed is the remaing profit -- and if you have planned carefully, it isn't much."

No, business do not plan to be in business for the purpose of collecting for the IRS. You might, but none of the Ftune 500 business I've been at do. Heck, none of the fortune 20 business I've worked at do.

MEGAMYTH #1>>Please, think about it. The cost of goods and services would be greatly reduced with the elimination of the current tax code.

If taxes were eliminated, they savings would remain inside the company. They would not be passed on. Once in a while a smaller company will do so in an effort to gain market share. Once they gain the market share they typically will adjust to higher prices. Hundai is a perfect example -- they aren't so cheap anymore.