Offshore outsourcing grows

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.

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.

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."

"Your problem is that you are so committed to the ideal of a free economy that you don't know what it means and cannot explain what you mean to anyone here."

I'm sorry you are straddled with a NEA education but many here concur with my explanation. A "free economy" was not once stated in any of my posts. A free market yes. There is a huge difference.

"Far less regulation - sure we all buy that. But you do not want so much freedom that we have lawlessness, so you do admit some law and regulation."

I never advocated "lawlessness". Never have, never will. Reasonable restraints on commerce comensurate with acceptable means of human rights and behavoiur are well within any real capitalist goal.

"The issue is how much? Apprently so little that you, yourself, and everyone you approve of can do whatever you want, but enough that others can do you no harm."

Ah, but you prefer the latter? You want me to buy only the specified toilet seats as outlined in OSHA Regulation Chapter 13, Section 109, Subpart A-19, page 317, paragraph 2, line 4. Is that what you want? A guide on telling my employees how and when to crap? You are the other extreme, unable to accept that modern society learned it's lessons from the 1890's.

"What you think you want, you don't, where interlocking trusts of banks and oil and real estate and railroads close you and me and every other small businessman out."

Yes, I'm really concerned about those railroads and the Rockerfellers. They are looking to buy out Bill Gates any day now and liquidate the big MSFT. The statements are so patently absurd, they are not worthy of debate.

"It is the problem in many ways, more ways than most of us can count. But it got that way by solving problems that our forebearers could not live with. And the government does solve problmes - lots of them - through enforcement of laws that we all agree need to be enforced - you know, bank fraud, securities fraud, fraud, theft, etc."

If government is the solution to all these problems you list, name the number of Enron and Worldcomm executives convicted and sentenced to date. Citicorp? Merrill Lynch? Bell South? AutoNation? AT&T? Lucent? Credit Suisse? Chase? Global Crossing? Shall I continue? The list is endless all the way back to 1981, yet the enforcement of said laws is skewed by the corruption of the government you proclaim is our saviour. Give it up. Let the market regulate via the vote of the dollar. It's a lot more punishing than the government since it's become a joke to most investment bankers.

Ah, but you prefer the latter?

Ah but like a cheap lawyer you put words in my mouth.

A "free economy" was not once stated in any of my posts. A free market yes.

Ok, now you are just quibbling (an argument about semantics to hide that you are not arguing about anything substantive). What you haven't answered is how free a market do you want? You already listed a host of folks who belong in jail or the civil law equivalent. I don't argue for a lot more than that.

Reasonable restraints on commerce comensurate with acceptable means of human rights and behavoiur are well within any real capitalist goal....name the number of Enron and Worldcomm executives convicted and sentenced to date. Citicorp? Merrill Lynch? Bell South? AutoNation? AT&T? Lucent? Credit Suisse? Chase? Global Crossing? Shall I continue?

From this, we really are not that far apart at all. The problem is that you are not a real free-marketeer either. The real genuine free-market folks defend these guys as examples of the capitalist system at work. Me, I think they are crooks and belong behind bars. You appaerently do too.

You want me to buy only the specified toilet seats as outlined in OSHA Regulation

No I don't. This is one of a myriad of examples of government gone amuck.

Yes, I'm really concerned about those railroads and the Rockerfellers.

Actually a lot of businesses would have gone under - including the entire travel business - if the government had not taken some actions against some of the big credit card companies and issuing banks, which tried to force companies to accept credit cards for transactions on which they would take a loss. And, I presume that your business is dependent, like most businesses, including mine, on really cheap telecommunications. Well we only have access to cheap telecommuncations because a certain federal judge broke up one of the biggest monopolies that ever existed. It freed up a lot of new business opportunities and made our current economy possible - but almost over the dead bodies of all the "true capitalists."

Well, I guess that leaves China and Mexico OUT, to name two of our "so-called" trading partners.

Funny isn't it how all of the so-called free market advocates around here are not really so free-market after all. Having recognized a need for some laws and some regulations and some protections of individual rights they have descended from their lofty hights of idealism into the political mud-wrestling down here on earth they have to argue along with the rest of us about which rights, how much freedom, where does your fist end and my nose begin that is the milk of why we have a political system. Some of us think that our Constitution is the beadrock of our life, liberty and pursuit of happiness, and that the masters of our universe should not be a bunch of MBA's who think they are the guardians of our capitalist system and should be allowed to do what they like with our money (and a lot of Federal Reserve provided money, lest they forget what business Allan Greenspen is in).

Some of us think that our Constitution is the beadrock of our life, liberty and pursuit of happiness, and that the masters of our universe should not be a bunch of MBA's who think they are the guardians of our capitalist system and should be allowed to do what they like with our money (and a lot of Federal Reserve provided money, lest they forget what business Allan Greenspen is in).

Well Said AJ. I concur. My general observation in working with a number of MBAs over the years is that there is a pronounced elitist streak in most of them...and its ENTIRELY undeserved IMO. The wacky notion that someone can be taught to be a “professional” manager/executive by studying half-baked business, economic and managerial theories without carefully learning the details of a business have destroyed many a company in the U.S.

And oddly enough, though I know a lot of people that washed out of technical disciplines in engineering and other hard sciences I can't think of ONE person that ever washed out of an MBA program. So I am not sure where so many MBAs get this "Masters of Our Universe" attitude. It must be something that the educators impart on them. Perhaps it’s why MBAs are such an insecure lot.

If our economy is to return to its former glory as an unstoppable economic powerhouse, companies are going to have to drop this generalist nonsense with MBAs and recruit more people that have REAL EDUCATIONS in science, technology and business mechanics. We have ENOUGH over-paid clueless prima donnas to last another 50 years.

What I am about to write here will provide much controversy but I highly encourage you all to think about it. For all of us about to be outsourced here in the United States, what keeps us from training our replacements improperly, I mean why would you impart your knowledge, the same knowledge that has taken you years of hard work and money to acquire, to some moron from a foreign country who is going to replace you and leave you without a way to provide for your family all the while the company that is currently asking you to do this, is using some of your tax dollars to replace you? What this whole situation amounts to is corporate america asking you to tighten the noose around your own neck and hang yourself for them. I know that it is unethical for someone to not train a counterpart properly but it is also not ethical for a company to ask you to hang yourself. Remember that all is fair in business, love and war and that we are all at war with the corrupt crooks running corporate america. The power is in your hands if you wish you use it! The CIA would never give away their knowledge but they sure would give misinformation in order to topple a regime they thought needed it. I encourage you all to think about that. How funny would it be to watch corporate america trip and fall just like they have caused the citizens of this country to do?

I would refuse to train my replacement.

I'd simply take a leave of absence or medical leave (mental).

If that won't work I would simply ask that they let me go.

IF they won't do that, then I'd grossly mistrain my employee:

"Yes, this is a custom version of Microsoft SQL Server. There are custom auto triggers which are written in assembly. Blah blah blah..."

I'd also create tons of tables with cryptic names. Dump dummy data in there, put tons of stored procs and views that call them. I'd be looking for a job in the mean time. ;-)

What everybody is forgetting is that the vast majority of companies never wanted to have permanent IT staffs in the first place. IT is still an ancillary function in most businesses, except those where the sale of IT products and services is actually the mission of the organization. From the perspective of a widget manufacturer: "I don't hire full-time plumbers to maintain the bathrooms in my headquarters - I outsource that to a service company. Why do I need to hire full-time IT people?" Now that foreign outsourcing has become available at a much lower cost than American outsources like IBM and EDS can match, a lot of companies who were already disgruntled about having to maintain an IT staff (full of, as they see it, unmanageable misfits) and got really steamed when salaries shot up in the late 90's are taking advantage of the opportunity to outsource a function they never really wanted to do in the first place.

IT is going in two directions: 1) Large, complex projects will be delivered as an outsourced service provided by a domestic or foreign company. 2) Small, custom projects will be absorbed back into the line of business who is using the technology, i.e., Sam the junior financial analyst will build an interactive Excel spreadsheet or Access database. Either way, the large, in-house IT Department will be dead as the dodo bird in ten years. If you want to be an IT professional, plan on working for a company that does nothing but IT (I expect American outsourcers will experience a resurgence of business in two or three years, once the shoddy results of foreign work become painful enough to the bottom line that the foreign outsourcing fad wears off).

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