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

Posted on 04/21/2003 11:41:20 AM PDT by 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.


TOPICS: Business/Economy; Culture/Society; Foreign Affairs; Government
KEYWORDS: freetrade; globalism; leftwingactivists; outsourcing; thebusheconomy
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To: sharktrager
So does paying off....oops lobbying Congressmen to get favorable trade deals, putting US firms in direct competition with foreign companies using child and prison labor, allowing foreign gov'ts. to subsidize their homeboys in order to drain market share from US firms and using taxpayer funds to help companies relocate their operations offshore thereby draining even more of the mfg. and tax base so hey why worry about free market tenets now?
21 posted on 04/21/2003 12:22:29 PM PDT by american spirit
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To: Voltage
In your friends case I don't see how he could ever hope to compete in a market that is dominated by overseas manufacturing (and has been for many years) unless they are producing 1) a low quantity of boards, prototypes, etc 2) custom jobs with really short turnaround times.

If he needs 10,000 peices or so every month or something like that then overseas manufacturing has been the way to go for 10+ years.
22 posted on 04/21/2003 12:24:12 PM PDT by Smogger
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To: 1stFreedom
I've several questions for you...

First, What makes you think that not voting for "pubbies" will make things any better?

Second, what would YOU do to "stop" this?

As a real life example I'll let you make the call on a business decision I'm mulling over.

I currently produce a "widget" and one of it's primary components is a piece of fabricated mild steel. I currently spend $13.51 per in quantities of 100, and then have to spend approx another 15 minutes of labor per part once I recieve it. The part is locally made, but I've just found a source in Tiawan that will provide the part not only complete with no extra labor needed, but also in Stainless steel rather than mild. The cost per part from Tiawan, including shipping and duty, is $12.85 ea.

In other words...Better quality, no extra labor needed, and cheaper as well.

I'd love to keep my local source, but in a product line where I already compete against foreign made and cheaper products what should I do????


23 posted on 04/21/2003 12:24:20 PM PDT by kissthis
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To: YankeeReb
I spent 23 years in hi-tech, and I have come to the same conclusion.
24 posted on 04/21/2003 12:24:59 PM PDT by Billy_bob_bob ("He who will not reason is a bigot;He who cannot is a fool;He who dares not is a slave." W. Drummond)
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To: american spirit
Can you say "economic warfare".
25 posted on 04/21/2003 12:25:31 PM PDT by RockyMtnMan
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To: Willie Green
Oh how relevant..I'm sitting here at work with a couple of Indian folks learning our programs so they can take our work to India. I recieved my layoff date of May 30th just last week. My 14 year computer career at ARCO/BP is just about over. Anyone know of any companies wanting to hire a GREAT employee? My resume is all ready, I'm just still in denial and don't want to send it out....
26 posted on 04/21/2003 12:31:05 PM PDT by MelBelle
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To: RockyMtnMan
Sure I can...been saying it since the 80's but ooohhh I'm a nasty "protectionist" you know one of "those people" that might want to protect the economy and sovereignty for our children's sake...terrible concept I know, especially with all this enlightened wisdom that surrounds us today.
27 posted on 04/21/2003 12:31:43 PM PDT by american spirit
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To: american spirit
Ultimately, the fact is that US labor is overpriced in the global market.

One reason Europe has been sliding for years is that their socialistic nature has forced companies to spend obscene amounts of money for labor. As a result, the foreign companies either outsource, move or fold.

In the US we have allowed labor unions to drive wages up for decades. This resulted in inflationary pressure, and brought other salaries up as well.

We are simply paying for the mistakes of the past.
28 posted on 04/21/2003 12:34:42 PM PDT by sharktrager
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To: Smogger
It was a 100 employee business, now just half of that, but sales are way up. Very specialized product, not the 10,000 piece, but perhaps 1,000 units built at a time.

He hated outsourcing the manufacturing, but was becomming impossible to get it done here.

It was a simple choice...outsource or die.

29 posted on 04/21/2003 12:36:49 PM PDT by Voltage
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To: RockyMtnMan
Except when the lawyers come after your company and take you for every penny, then it's not so cheap anymore is it?

For the typical MBA manager, it is not their personal liability, so what do they care as long as they meet the today's targets?

30 posted on 04/21/2003 1:03:22 PM PDT by glorgau
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To: A. Pole
bump
31 posted on 04/21/2003 1:07:21 PM PDT by Feldkurat_Katz
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To: glorgau
For the typical MBA manager, it is not their personal liability, so what do they care as long as they meet the today's targets?

Besides, the MBA manager will likely move to another company long before $hit hits the fan...

There are hordes of MBAs who spend their entire lives destroying one company after another.

32 posted on 04/21/2003 1:09:43 PM PDT by Feldkurat_Katz
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To: 1stFreedom
"I know that for myself, being a die hard conservative, I will not vote for Bush or pubbies in the next round of elections if they do not stop this outsourcing problem."

I feel the same way. However, if we are not major corporate campaign contributors, Bush & Co. will not care.
33 posted on 04/21/2003 1:20:45 PM PDT by thetruckster
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To: glorgau
Good point, most IT managers are idiots and couldn't manage their way out of a paper bag.
34 posted on 04/21/2003 1:29:05 PM PDT by RockyMtnMan
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To: kissthis
I'd love to keep my local source, but in a product line where I already compete against foreign made and cheaper products what should I do????

Sit down with your local supplier and talk the issue over.

Remember that the three legs of the stool are price, delivery and quality. Will the overseas supplier be able to react to varying needs? Will lead time (and therefore inventory costs) be increased? Will dimensional quality be as good? Is the stainless the overseas supplier is using quality material?

If all these factors come out in favor of the overseas supplier, your local guy has problems going beyond labor rates.

I was once operations manager for a plant where using Amercian castings, we could beat the Koreans on price AND quality for butterfly valve bodies. And that was before we sped up the machining process by about 6 to 1.

Americans can compete (and win) in manufacturing when we use our two major advantages: innovation and individualism. I'll bet your supplier's employees can find an answer to the problem.

35 posted on 04/21/2003 1:41:06 PM PDT by jimt (Is your church BATF approved?)
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To: sharktrager
Why is it overpriced? Isn't our standard of living much higher than the vast majority of countries? Don't we have to pay a considerable share of our gross incomes to a bevy of income, property and sales tax sources which probably amounts to about 50% or more of that income total? Look at the other expenses we have to contend with....higher premiums for healthcare because our fedgov foolishly thinks we should have an open door policy for anyone who can get to the emergency door, paying for school food programs because their hungover, fat-butt parents can't assume personal responsibility for their own children, etc. Our biggest problem is this bloated nanny gov't thinks it needs bigger and better programs for all of the generation after generation of ill-equipped people who can't or won't deal with daily life. (I tried to be kind) We've become a place where the phrase "from each according to his ability to each according to his need" ......Karl Marx would be proud.
36 posted on 04/21/2003 1:41:16 PM PDT by american spirit
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To: american spirit
None of those thing have anything to do with why it's overpriced.

Wages go up, there is inflation and the value of the dollar falls. It is a natural economic cycle. The end result is that the same unit of value, whether it be hour of work or price of a Big Mac, increases in cost. In nations with much less historical inflation the relative price continues to fall.

As for standard of living and taxes, that is irrelevant. The value of labor is not relative to anything more than what it is capable of producing. If I can get someone in India to do the same job as an American, but at 25% the American's cost, the American is overpriced.

This is an economic argument, and your issues are purely emtion based.
37 posted on 04/21/2003 1:47:50 PM PDT by sharktrager
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To: Feldkurat_Katz
There are hordes of MBAs who spend their entire lives destroying one company after another.

You are absolutely right about that. I can't count the number of Job Hopping MBAs I have encounter in the business world over the years. In "general" they rarely stick around in any one company to prove their mettle or face up to their mistakes. It's all about building that resume and grabbing the next title. And I must say most MBAs I've dealt with think in very superficial terms and don't like getting their hands dirty with the messy details of running a business. They also have a religious-like devotion to certain business platitudes...whether they work or not.

I'll never forget a conservation I had some years ago with a Yuppified MBA at a Republican Party Pow Wow that perfectly represented his ilk. This guy was bragging to me about how big his staff was at some Life Insurance Company and how he had delegated virtually "all his responsibilities away" to the people that worked for him. When I asked him what his value was to the company since he, himself, didn't do anything except build empires I got quite the nasty look. Yeah, it doesn't have to make sense when a Fad is in full bloom. You just do what everyone else is doing.

38 posted on 04/21/2003 1:55:30 PM PDT by WRhine
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To: sharktrager
No such thing as a truely free market.

Free markets are fine in local market. It's not a good idea to have a gloablly free market.

NOBODY here can compete for pennies on the dollar.
39 posted on 04/21/2003 1:58:06 PM PDT by 1stFreedom
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To: Willie Green
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.

Whom will they hire?

40 posted on 04/21/2003 2:09:04 PM PDT by A. Pole
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