InformationWeek: The Business Value of Technology

The biggest reason is the shortage of U.S. IT talent. Companies say it's almost impossible to find enough good developers-and even the not-so-good ones cost a fortune. In contrast, areas such as India and Eastern Europe have access to thousands of programmers, many with Java and other Internet-related skills, available for $20 to $50 an hour. "Why spend months searching for a second-rate U.S. programmer when you can instantly find a first-rate one overseas at half the cost?" says John Tuder, CEO of Videos.com, a Dallas startup that's developing technology to deliver movies via set-top boxes and over the Internet.

Tuder spent much of Videos.com's first round of funding on software development, relying on Indian software firm Wipro Corp. to handle high-level architectural design and low-level coding. "I couldn't do half the development work [in the United States] for the same price and level of competence as I find in India," Tuder says. Videos.com uses 18 offshore programmers from Wipro, more staff than it has in Dallas-and Tuder expects that once second-round financing is completed, he'll be employing even more offshore workers. "They are on schedule and on budget with every aspect of a very large job," he says.

Among America's biggest companies, those using offshore programming include American Express, Aetna U.S. Healthcare, Compaq, General Motors, Home Depot, IBM, Microsoft, Motorola, Shell, Sprint, and 3M. General Electric uses four major Indian partners with dedicated facilities that employ 3,200 people who develop and maintain GE's systems, says Farley Blackman, a former director of offshore development at GE who's now CEO of outsourcing consulting firm StrategIM Corp. in Burlington, Vt. By 1999, "GE accounted for 8% of India's $4 billion software export business," Blackman says.

The trend is helping propel rapid growth in the IT economies of the supplier countries. In India, easily the biggest provider of offshore programming, IT exports have grown more than 55% a year for the past five years and are expected to reach $87 billion by 2008, according to a report McKinsey Group published last December. Some Indian services companies have become major suppliers in the process, such as Wipro, with $532 million in revenue.

But other countries are getting in on the act: According to research firm IDC, Mexico's offshore IT income will surge more than 80% to $30 million this year. "We've seen a steady increase in the use of offshore programming in recent years, and it's a trend that will continue for some time to come," says Rita Terdiman, VP and research director at Gartner Group. Besides India, Gartner sees IT expansion in places such as Egypt, Israel, Bulgaria, and Slovenia, she adds.

Russia has proved a good source of talent, according to Boeing Co.'s Commercial Aviation Group in Long Beach, Calif., which became aware of the skills available after it opened an office in Moscow. Rather than develop a state-of-the-art document-management system in-house, Boeing turned to IBS in Moscow. The system, called eMod, stores everything from Standard Generalized Markup Language text fragments to large graphics and video files.

"The eMod project is the Holy Grail of document management in that it stores a diverse range of content efficiently and has massive scalability," says Doug Alberg, senior manager at Boeing Commercial. "We simply defined the project at a high level and IBS took care of most of the details."

There are many other examples of big companies turning to offshore firms for sophisticated high-end projects. GE contracted India's Mascot Systems to Web-enable its legacy backbone and create an online invoicing system for its client base. Disney Co. hired another Indian firm, Pentafour, for high-end animation work. DaimlerCrysler's Mercedes-Benz division uses Infosys, also in India, for a variety of E-commerce assignments. Nortel Networks Corp. uses Wipro to write software for high-speed optical switches.

Many midsize companies and startups are also turning to offshore outsourcing, helped by improved international communications links and spurred by the need to get software developed quickly. "In the near future, it's the smaller and midsize companies that will profit the most by outsourcing offshore, as their expansion is often limited by an inability to find technical personnel," says Tom Lovely, president of Offshore Software Consulting, a Manchester, N.H., firm that specializes in hooking up U.S. firms with offshore partners.

Synxis Corp., a Denver application service provider that provides hospitality industry services, turned to Bulgarian programmers for a vital online hotel-reservation system. "This was more than time to market," says Art Blomberg, Synxis' director of hospitality development, "this was our do-or-die release. We'd made commitments to investors and clients that we had to fulfill."