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The Second Decade Of Offshore Outsourcing: Where We're Headed

Execs now prefer to call it 'globalization.' Whatever the name, it's gaining steam and bringing new risks and requiring new strategies.

Offshore outsourcing of IT has changed everything about Scott McKay's job at Genworth Financial, right down to what time he gets to the office. McKay, CIO at the provider of life and mortgage insurance, now arrives between 6 and 6:30 a.m. so he can spend the first two hours of the day dealing with IT teams--employees and outsourcers--in India and Europe before the U.S. workday starts. The first thing McKay does is click on a feed customized to deliver summaries of major news stories in India, plus other happenings around the world directly related to Genworth's business.

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In 10 years, Genworth has gone from offshoring just a few IT projects to having about half of all its IT work done outside the United States. But McKay avoids the word offshoring--he, like many a CIO, prefers the "g" word. "The concept of offshore outsourcing will continue to dissipate," he says, "and we'll focus on globalization."

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Scott McKay, CIO, Genworth Financial

Genworth Financial used to have 80% of its work in India done at night, to serve U.S. customers. Contractor turnover soared. Says Genworth CIO Scott McKay, "The night shift was designed for short-term cost savings, rather than designing your company to be a truly global business."
OK, so what does that mean exactly? As companies head into this second decade of offshore IT outsourcing, globalization is starting to be more than a polite way to say "dirt cheap foreign coding." Cheaper is still important. But businesses in North America and Western Europe, at least those with any track record of success with their offshore providers, are getting closer than ever to those vendors--for example, trying to help them deal with employee retention, treating those problems as their own. Companies also are holding their offshore providers more accountable for costs and outcomes, with shorter contracts and more incentives tied to business results. And they're trusting their offshore providers with more-critical work.

Two-thirds of companies on the InformationWeek 500 list of business technology innovators say they do offshore IT outsourcing, up from 43% in 2004. Consulting firm NeoIT estimates that 75% of the world's 2,000 largest companies are engaged in offshore outsourcing, with 20% of their IT budgets spent on offshore contracts; it predicts that could rise to as much as 40% of budgets in the coming years.

Cost cutting is usually the main driver, but as companies rely ever more on foreign markets for revenue growth, they're rethinking where they want their employees, including those in IT. For Genworth's McKay, it makes sense that globalization of the IT workforce follows globalization of the business: About 30% of the company's revenue now comes from outside the United States, and that's projected to grow to 50% by 2010. About one-fourth of InformationWeek 500 companies say they're expanding their IT operations in China, India, or another part of Asia.

As offshore outsourcing heads into its second decade, it's bringing new risks. CIOs must figure out how they'll nurture the next generation of IT leaders if, with greater outsourcing, there isn't the same career ladder that gave today's IT architects and project leaders both hands-on system work and deep company knowledge. U.S. companies that are putting ever-more strategic projects and processes into the hands of offshore outsourcers must be even better at vendor management, or they'll repeat last decade's offshoring problems--unexpected costs, code that doesn't meet business needs, vendors without the skills to meet a contract, delays implementing critical new systems--on a bigger scale. With costs in India rising, and employee attrition rates of 12% or more common among IT service providers, they'll need to fight for top talent with every bit as much energy as they do at home.

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