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.

[Black Agnes]

Managers. They'd never outsource themselves.

[1stFreedom]

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

Well, the pubbies are in control. They could do something right now. If they don't, then at least the dems can give it a shot. They tend to be more union and "employee" centered on such issues.

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

Easy. A high tax on outsourced white collar employment. Ship operations or outsource overseas, well, add a 45% tax fee on GROSS income (not net) of the operations located overseas. You'll see such outsourcing grind to an immediate halt, and in fact, probably reverse directions.

>>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.

We have already lost the blue collar war and nothing can really be done about it at this point.

The white collar war is next and if we loose that, you and I'll will have plenty of employment choices: Janitor, barber, streetsweeper, etc. Get the picture?

>>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????

The problem u face is getting Americans to buy American products. That could be your angle. Sell to WalMart which also has a similiar angle. Advertise how buying your products helps the economy.

[1stFreedom]

Due to the DEMOCRAP campaign finance laws, smaller donors are more important now.

My own business gave $300 to the Republicans last year. That $300, if I even have it, may just go to the democrats.

[1stFreedom]

I disagree.

For example, it is very easy for a small to mid size company outsource the management of a website. You just need a couple of programmers at best.

In fact, from an economic standpoint, it could be very profitable if small to mid sizes businesses outsourced at least a portion of their IT work.

Website management, including e-commerce, can been done from the North Pole if necessary.

[1stFreedom]

Free enterprise is local. It's not global.

Free enterprise has to be based upon the model of a community. It's why wages are higher in the east coast then in the midwest. This works fine.

Free enterprise is an utter failure for Americans when it is on a global scale.

Finally, there is no such thing as "free enterprise" The goverenment already regulates *all* business to various degrees.

People, stop worshiping at the Idol of Free Enterprise.

[A. Pole]

Except when the lawyers come after your company and take you for every penny, then it's not so cheap anymore is it?

Unless the lawyers are outsourced too :)

[sharktrager]

While it is true that a purely free market is not idea, and is also not possible, it is also true that, in a global economy, it would be foolish to force all American firms to utilize only American labor, and price themselves out of external, and even internal, markets.

[kissthis]

I already compete because my quality and delivery are superior, but product costs continually cost me sales. It's the third leg of the stool that's tipping me over.

I've already talked to my local supplier who claims "go for it, I can't compete with that price".

The quality of the Taiwan product is far superior and the only drawbacks appear to be leadtime (which is managable) and some loss of control (much easier to discuss "issues" when the supplier is just down the road).

Don't get me wrong....I don't think I'll be going with the Taiwan supplier. My current tact is to try to replace the fabbed steel components with cast aluminum. Done locally as well, and at a good price. It won't necessarily be cheaper but, will make the product just that much more superior as far as quality. It will just have to be done with a subsequent change in marketing to appeal to the higher end market in the product line.

In a way, I'm with you....If you can't beat them on price, beat them with your brains.

[1stFreedom]

No it doesn't.

First, the "free market" is not some infallible dogma. It's a concept which seems to offer the best economic rewards.

However, the "free market" is an utter failure if this market is on a global scale. It may benefit the corporation, but it hurts the economy. If it hurts the economy, it's bound to come back and bite the corporations in the rear.

Finally, whose country and economy are we trying to build, ours or India's? I'd rather the money stay in country and the resulting taxes benefit our military.

I'm an American *first*, not a Capitalist. You may worship the Idol of money, I don't.

[Black Agnes]

What exactly are we trying to optimize. America's economy, or the bottom line of some international corporation?

[A. Pole]

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.

Do not waste time and learn other trade, if the funds are not exhausted in your state (Turkey and others have priority don't you know) you can get some money for retraining while receiving the unemployment benefits.

[A. Pole]

One reason Europe has been sliding for years is that their socialistic nature has forced companies to spend obscene amounts of money for labor.

You are mistaken. Europe is catching up (depsite all this sliding and supposedly higher unemployment) in GDP per capita. They have much less deficit if any and the euro is going up. Since the stratification is smaller the median income in some Western European countires is significantly higher.

The main problem of Europeans is that they do not have enough children to preserve their populations.

[Black Agnes]

What would you advise receiving training to do? Inquiring minds want to know...

[american spirit]

The issues I brought are not just based on emotion, it's based on facts. The average American is far more burdened due to the factors I outlined previously than someone living in what we consider the third world. No doubt their cost of living is far less thus they do not require the same salary structure as most Americans. If we take your argument further why not import 500 million hungry Chinese and drive down wages even more? Is it just about finding the lowest priced labor possible or having a viable, thriving economy. In my estimation, it's nothing more than a race to the bottom and believe me, we're well on our way.

[1stFreedom]

>>in a global economy, it would be foolish to force all American firms to utilize only American labor,

No it wouldn't be foolish at all. Think about it. If a majority of jobs are outsourced, then you will have a high unemployment rate. Since many blue collar jobs are already outsourced, what options do the unemployed have? Not very many.

It's foolish to allow us to surrender our industrial capability to other countries in the first place. It's too late for that now. Now the fight is over white collar jobs.

Isn't if foolish to allow jobs to leave the country while trying to get the economy jump started?

[BJungNan]

The U.S. is definately late in coming to the party (no pun intended) in China but inquiries are definately up with our company.

Keep in mind that not all companies looking to source in China will succeed. Many will ignore all advise, checking their business sense at home when they check their bags for the overseas flight. Many will lose plenty.

[Billy_bob_bob]

I'm curious as well. I've seen many formerly high-paying jobs turned into marginal employment opportunities at best, thanks to massive Chinese and Indian H1-b and L1-b immigration. Please be so kind as to inform the rest of us of just what we are supposed to train for? Furthermore, once we have indebted ourselves to acquire this training, how do we know that this new field won't be torpedoed by H1-b's like hi-tech was?

[thetruckster]

Not that I love the Democrats by any measure, but it was pretty darned interesting that many governmental blind eyes were turned in their sockets for a number of large corporate donors. The Democratic and Republican governmental EMPLOYEES need to be looking out for the people instead of their campaign contributors. The government shouldn't be auctioned off to the highest bidder, and that is still the state of affairs (IMHO).