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.
He hated outsourcing the manufacturing, but was becomming impossible to get it done here.
It was a simple choice...outsource or die.
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.
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.
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.
Whom will they hire?
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