Strategic CIO // IT Strategy
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5/6/2005
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Onshore Outsourcing: Made In America

Startup Rural Sourcing has an alternative to offshoring: outsource IT work to smaller U.S. cities. The pitch? It's still cheap and helps American workers.

Why send IT work to India when you can pay a little more and have it done in middle America or the South? The concept of providing IT services from some lower-cost regions in the United States made so much sense to Kathy White, former CIO at health-care conglomerate Cardinal Health Inc., that she took $2 million of her own money and started a business around it. "If we can outsource to India, then we can outsource to Arkansas," White says.

Kathy White sees an untapped base of unemployed people across the country

Kathy White sees an untapped base of unemployed people across the country.


Photo by Brad Jones
With that idea in mind, White last year launched Rural Sourcing Inc., an application-development provider that operates in small towns such as Jonesboro, Ark., and Greenville, N.C. Her goal is to build a company that provides high-quality IT work at a reasonable cost while employing Americans. "I believe in a global economy," White says. "What I don't believe in is for us to leave untapped potential in a base of people who are unemployed and eliminate a whole profession in the U.S."

Although recent government statistics show that IT employment in this country has rebounded strongly since the dot-com crash and 9/11, many labor advocates, such as Alliance@IBM and the Washington Alliance of Technology Workers, say the practice of moving computer programming and services jobs to low-cost countries such as India and China has left too many American IT workers unemployed.

White wants to help fix that. The idea for Rural Sourcing came to her while she was CIO at Cardinal Health, a post she assumed in 1999 following Cardinal's acquisition of Baxter Healthcare, where White served as technology chief. In the mid-'90s, when much of Baxter's IT staff was tied up with a major SAP enterprise-resource-planning implementation, White needed help with basic application maintenance. She turned to the computer-science department at her alma mater, Arkansas State University. With the help of school administrators, she launched an internship program under which students could gain practical experience by working on projects for Baxter.

White also believed the program could serve as a farm system for the health-care company's IT department. "The goal was to get people working with us and then recruit and train them," she says.

White left Cardinal Health in 2003. A year later, after putting together a business plan, she launched Rural Sourcing. The company has 35 staffers, but White expects to double that in the coming months as its Greenville facility comes online and its customer list grows. The company specializes in developing applications for vertical industries with a large presence in the locations where it operates. For instance, staffers in Greenville will focus on building applications for many of the large health-care companies based in the Raleigh, N.C., area. Staff in Jonesboro will concentrate on supply-chain and distribution applications for the retail industry.

Officials from Arkansas Gov. Mike Huckabee's economic development office worked with Rural Sourcing to help launch the operation. State officials say they've made it a priority to create an infrastructure and business conditions that will attract and keep high-tech jobs. "We know we're no longer just competing with other states; we're competing with India and other countries," a spokesman for Huckabee says.

Arkansas also is helping Rural Sourcing get going by giving it work. Among other things, Rural Sourcing built the state's eCorridors Web site, which promotes Arkansas' participation in a regional fiber-optic network designed to boost research and commerce in the state.

To date, Rural Sourcing has signed several major customers, including Cardinal Health. Toymaker Mattel Inc. also has farmed out some work to the company, as has a major telecommunications company that White declined to identify.


Cibersites plans to open six development centers across the country, says Tim Boehm, president of Cibersites

Cibersites plans to open six development centers across the country, says Tim Boehm, president of Cibersites.
What's driving some of these companies to send IT work to rural America rather than India is a combination of cost savings and convenience. Rural Sourcing bills about $38 to $45 an hour for programming work. That's considerably less than the $80 an hour that an experienced programmer in a hub like San Francisco could command, but somewhat more than what a company would pay for developers in India, where a good Java coder in a major city gets $23 an hour, according to White and Tim Boehm, president of Cibersites, a new division of systems integrator Ciber Inc., focused on opening application-development centers in smaller cities around the country.

However, White argues that the cost of moving work offshore can't be measured solely by hourly labor rates. "People are mistaken when it comes to the true cost of offshore labor," she says. The additional executive hours needed to manage an offshore engagement, as well as travel and other startup costs, must be factored into the true cost of offshore outsourcing. The additional overhead that comes with offshoring puts the price of such work in the $30-per-hour range or higher, she says. "For an additional cost of 5% or 10%, it's very appealing if you can get the work done at home," she says.

The idea of rural IT outsourcing looks promising, but it's worth remembering that many small towns across the United States looked to the call-center industry for their next big economic boom. And while many companies did in fact move customer-service and billing operations to smaller communities to take advantage of cheaper labor rates, many of those same companies ultimately moved the operations offshore for even bigger savings.

Rural Sourcing's business plan seems to make sense; it offers customers low-cost benefits similar to offshore outsourcing while keeping the work onshore. But some analysts are skeptical about the company's chances of making a big impact on the market. The prospects for outsourcing to middle America are limited by the fact that there simply aren't enough skilled IT workers in small communities to take on comprehensive outsourcing engagements, says Frances Karamouzis, an analyst at market-research company Gartner. "They could get work on a project-by-project basis, but I think they would have a hard time getting beyond that," says Karamouzis, who concedes that Rural Sourcing's "Buy America" ethos could catch on with some customers.

But White believes she has an advantage when it comes to recruiting. She has been able to attract top talent by pitching quality of life and low cost of living to prospective employees and executives, she says. She already has convinced a former executive at offshore IT-service provider Caritor Inc., who had been living and working in California, to join Rural Sourcing in Arkansas as executive VP for operations. And a help-wanted ad the company ran in a Jonesboro newspaper drew more than 500 applicants from 35 states, as well as a response from a job seeker in Australia. Most of the applicants are of the same caliber as IT workers that applied for positions at Cardinal Health when White ran its technology department, she says.

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