The Politics Of Outsourcing

More than ever, world events affect offshore outsourcing choices.

InformationWeek Staff, Contributor

August 30, 2002

3 Min Read

With the volatility in the financial-services industry, outsourcing is especially crucial now, she says. "I can take my offshore people down to zero on two weeks' notice," she says. "But I couldn't do that in the U.S." Another benefit: She expects a 55% savings as the company moves forward with other offshore projects.

Cost savings are one of the main reasons that businesses use offshore outsourcers. The Aberdeen Group says overseas labor rates can save a customer up to 65%, compared with using a U.S. company. But once project-management costs and other overhead are factored in, the savings typically amount to 45%.

As offshore outsourcing gains credibility, Landon and other business-technology managers may soon have more choices. While India has already made a name for itself as the gold standard in call centers, help desks, and application and network maintenance, Russian companies, whose IT pros enjoy an excellent reputation in math and engineering, want to do application development. There's a large talent pool of Russian engineers available to the commercial sector, more than 1 million, according to an estimate from the World Bank.

Luxoft, a Russian software development and outsourcing firm, saw a slowdown in business in the months after Sept. 11, CEO Dmitry Loshinin says. Luxoft, a member of the IBS Group, a large Russian IT holding company, employs more than 2,000 IT professionals. Many potential customers revised their IT plans following the terrorist attacks, and their new IT strategies included outsourcing, Loshinin says. And then after the India-Pakistan standoff, they wanted to ensure stability. "Large companies want several vendors in several different countries," Loshinin says. "Russia is just beginning to appear on the radar of these companies. We spend a lot of time to convince them to work with Russian programmers."

This year, Luxoft's largest outsourcing customers have been financial-services companies. Much of the work is in developing mission-critical applications where security is paramount, although work in other areas is picking up, too. A typical project costs around $1 million and takes between six months and one year, Loshinin says. "Ninety-five percent of our clients repeat the business. It can develop into a large deal."

While India and Russia are among the more prominent countries for outsourcing, they're by no means alone. Name a country and if it doesn't have an IT workforce already, it's working toward it. Perhaps inspired by successes in India, entrepreneurs and governments in places such as El Salvador, Fiji, Ghana, and Jordan are exploring the idea.

That may work out well for businesses looking to reduce their political and financial risk by spreading their offshore outsourcing among multiple countries and regions. Cummins Inc., a maker of electrical power generators and other equipment, last year hired Indian outsourcer Tata Consultancy Services for mainframe application support and has since added application development.

Cummins plans to expand into other regions such as the Philippines and Eastern Europe. But the big prize is China, says Rob Neitzke, director of offshore development, where Cummins has been working with manufacturing partners for some 30 years. During the next three to five years, Cummins plans to diversify its IT suppliers. Neitzke is encouraging Tata to develop relationships in China and to do work there so Cummins doesn't have to manage the work and the relationship itself. Already, Tata is opening development centers in China.

While Neitzke acknowledges that language and culture can be hurdles in China, he's not particularly concerned. "They can code as well as anyone else," he says. "Conversational English is a problem, but that's improving as new generations" come along.

Neitzke cautions other business-technology managers to be careful about sending their offshore outsourcing work to too many countries. He says it's important to have enough IT workers in one place to handle unexpected problems, last-minute changes, or additional projects. "If you start dividing your work among many countries, you may not have enough people to have critical mass."

Illustration by James Kaczman

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