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.

[PuNcH]

A free market is the ultimate concept of inalienable rights but you don't see that. With a free market people are given the power to be as much as they want to be based on their desires and abilities. But you want to "level" the playing field for those that are not able to compete.

Then you must explain in detail what is bolded instead of attributing a strawman argument to me. I have constantly pointed out that govt intervention is making us uncompetitative with for instance slave labor. Please explain how the free market will solve this problem? For instance in china there is still slave labor and now nuclear weapons pointed our way. Before there was just slave labor. Not people we should be nice to but at least they couldnt kill millions of us.

[nanny]

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.

Yes, I did know about that - don't think you have to be a corporation to do so. Our accountant is suggesting we go ahead and buy a motorhome as we did once travel and work in a motorhome and want to do it again. He said right now is a good time.

I don't always think loopholes are a bad thing - we all use them if we can - but I just didn't understand when someone says corporations don't pay taxes. I see they just pass it along - that I did know.

[MonroeDNA]

"That simply does not respond. I'm talking about the difference in a market that may be perfectly happy with slavery, hired killers and mass murder gladiator combat at the local stadium"

Ahhh, black slavery in Sudan. Yes, it is a problem.

" If you can understand"

Certainly.

"that our govt going to war against an enemy

Yes..."

does not automatically mean we are socialists"

But your next paragraph does

Wthen you can also understand that govt that protects us against slave labor is also not a socialist one. Our govt protecting us against unfair intervention by another govt does not mean we have fallen into socialism.

[MonroeDNA]

Read Ayn Rand, and be free.

[MonroeDNA]

Eventualy, you will realize you were duped.

[frosty snowman]

As an unemployed former computer programmer I figured I'd throw my $0.02 in here. This trend of offshoring is eating up US jobs and shrinking up the tax base in many states. I have only been unemployed for a few weeks, but know of senior programmers formerly with 100K salaries unemployed for 8 or 10 months. I believe that soon, only "service sector" computer/IT jobs will be available in the US, since all software will be written overseas where you can hire three foreign programmers for the price of one American programmer. During the dot-com boom, tech companies were frustrated at the lack of available, qualified applicants and were always looking for ways to expand the labor pool. Now the big companies that are left see their salvation in offshoring, at a time when there is a qualified labor pool in the US looking for work. I earned a computer science bachelors degree about six years ago. Like many of my peers, I drank the dot-com kool aid believing the internet was a radical new way of life that would make us millionaires, or at least grant us a permanent upper-middle class status in life. Now I see those perceptions were all a mirage. Had I not been so naive I would've made much different choices. At one point, I likely could've had a more secure Gov't job but I went after the dollar signs instead. But everything in life is temporary, especially in the IT world. Frankly, I wish I could find some reasons for optimism but the way I see it there just aren't any right now.

[Beck_isright]

" I have constantly pointed out that govt intervention is making us uncompetitative with for instance slave labor."

"We live in a world full of govt intervention by hostile govt's that have huge interests in undermining America."

Your words, not mine. Continued:

"I accept a free market with free also meaning respected inalienable rights, but that is exactly what we do not have."

Again your words, not mine. Continued:

"We are paying for this by watching communist china turn into a modern nuclear power who has threatened us with war and certainly threatens a new cold war."

Ok, now to point out what your bolded words have to do with my points. You are so concerned with "slave labor" that you are overlooking the necessary steps that should be taken to free our markets again. In post # 204 on this thread, I proposed a logical solution:

" I'd like to take a shot at this. De-regulate further (something we'll never live to see). Make all payroll expenses below the board level a 100% tax deductible expense. No payroll tax, no income tax liability and restricted to American citizens only. Thus there would be incentives to stay in the USA and hire American employees only. Of course, that would require imagination and cunning and neither political party has anyone with the brass ones to do anything like this."

The first step is the elimination of the "payroll tax". It creates a burden on the employer beyond that of just sending an employee's money to the IRS. It creates paperwork and a level of bureaucracy which restricts businesses from paying what an employee would actually be worth. How? Because if forces the "government premium" into every salary. Instead of the actual preposition of "how much is this employee worth and how much will I profit from them" the current structure of government impediment creates the "how much will this employee cost me" mentality. Slave labor is just that, free. If I owned a business and could hire someone for 75 cents per hour vs. the minimum wage it is a no brainer. But your points are to protect "inalienable rights" for all members of the human race. This is impossible until we conquer the world. We must focus within our borders and convert others to our way of thinking. To do this, we must take the governor off of our economic engine and let it run wide open. Othwerwise, enjoy the 1-2% growth rates the next 10 years.
We survived the USSR. We will survive China also. The nuclear issue is a non-starter.

[nanny]

Communists infiltrate unions.

Communists infiltrate unions - and political parties (both sides), colleges, boardrooms, churches, military, schoolboards, city councils, law enforcement, television, movies - anywhere there are people to be influenced - they will be there. Unions do not have exclusivity there.

I would be willing to be we have many more communists in the government than are in labor unions.

[Beck_isright]

"I would be willing to be we have many more communists in the government than are in labor unions."

Yes, simply dial (202)555-1212 and ask for the switchboard number to the US Department of State. Then just hit extensions at random and you'll find 90% of them.

[MonroeDNA]

You are right, but...

Communists focus on unions, as a starting point.

But before that, they go for envy. Rich against poor; wages; etc.

Typical methods are to pit wages of service people against wealth creators. McDonalds folks against bill gates.

[MonroeDNA]

The US state department is infested, thanks to
Clintoon.

And they are still entrenched.

[Beck_isright]

I hate to do this, because I do understand your situation ALOT since I was downsized then became a consultant and helped other companies do the same...but...

"This trend of offshoring is eating up US jobs and shrinking up the tax base in many states."

This phrase is a fallacy. It is not "shrinking" the tax base. That would mean the death of an individual. It means that the ability of the government to spend the ill gotten gains has been reduced by the percentage of reduced salary of each individual. The difference is glaring. The tax base (number of income producing capable individuals) in a state is the same. The problem is the term "reduction" is not in a tax and spenders philosophy.

"I have only been unemployed for a few weeks, but know of senior programmers formerly with 100K salaries unemployed for 8 or 10 months."

If they are "senior programmers" please answer this one question: WHY THE HELL HAVEN'T THEY STARTED THEIR OWN BUSINESS??????

"I believe that soon, only "service sector" computer/IT jobs will be available in the US, since all software will be written overseas where you can hire three foreign programmers for the price of one American programmer."

Bunk. Build a better mouse trap and the world is yours.

"During the dot-com boom, tech companies were frustrated at the lack of available, qualified applicants and were always looking for ways to expand the labor pool. Now the big companies that are left see their salvation in offshoring, at a time when there is a qualified labor pool in the US looking for work."

No, there is a qualified labor pool refusing to accept market conditions. Will the so-called "senior programmers formerly with 100K salaries unemployed for 8 or 10 months" really accept $40,000 per year jobs? I doubt it.

"I earned a computer science bachelors degree about six years ago. Like many of my peers, I drank the dot-com kool aid believing the internet was a radical new way of life that would make us millionaires, or at least grant us a permanent upper-middle class status in life. Now I see those perceptions were all a mirage."

I made a similar mistake in the 70's with my degree but turned my life around. There is no "grant" of status. The mirage is self-imposed. You have to learn that you create your fortunes, they are not given to you.

"At one point, I likely could've had a more secure Gov't job but I went after the dollar signs instead."

Bad news Buckwheat. The .gov is outsourcing now too.

"But everything in life is temporary, especially in the IT world. Frankly, I wish I could find some reasons for optimism but the way I see it there just aren't any right now."

I do not know your field of expertise within IT now would I dare advise you on what is best to do because I do not know you. But if I were you, I would learn the lesson I did:
Do not depend on others. Become your own man, your own company. And market your skills not as an "employee" but as a product to be bought sold and traded. If you have other friends with high level skills make it a corporation and sell your services as a group. Find out what the industry is doing, then do it better and cheaper. You'll make more money in the long run.

[MonroeDNA]

"I would be willing to be we have many more communists in the government than are in labor unions."

Yes, because more than one communist is in each union. And the largest unions are government unions.

Of course.

[Beck_isright]

Clintoon? Try Carter. There are still some dinosaurs from that nightmare roaming the halls and they still have SECURITY CLEARANCE!!!!

[Ciexyz]

Western PA (my area) and our tri-state area (Ohio and West VA) suffered when the steel industry declined and American steel companies acquired steel mills overseas. American companies refused to reinvest in American steel mills.

Now it's happening to other industries. And it's happening to white collar professionals, not just blue collar workers.

Welcome to Modern America. That's the way it is, folks.

[MonroeDNA]

The largest growth industry projected in the next 20 years is IT.

So either you suck, or are lying. Likely both.

[MonroeDNA]

Nobody owes you a living.

[Ciexyz]

I received my layoff date of May 30th just last week....

Sorry to hear about your layoff notice. Here's wishing you good luck in your employment search.

[Ciexyz]

Nobody owes you a living.

I have no problem with that statement.

[GregoryFul]

Managers typically have no idea what software developers do anyway.