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Offshore 'Hiccups In An Irreversible Trend'

Dell and the state of Indiana change course on initiatives, but not broader strategy
The reining in of a pair of high–profile offshore relationships late last month shows how the movement of IT and customer–service operations to lower–cost overseas locales still carries sizable business and public–relations risks.

Dell is returning technical support for large business users of its Optiplex PCs and Latitude notebook computers to U.S. call centers from its company–owned facilities in India, where the computer maker ran support operations for the past three years. The move, a Dell spokesman says, comes after some customers complained about poor service.

Indiana Gov. Joseph Kernan

Indiana Gov. Kernan canceled a contract with the subsidiary of an Indian company after state workers complained.

Photo by Michael Conroy/AP
The same week, Indiana canceled an IT services contract with TCS America, the U.S. subsidiary of Tata Consultancy Services of India, amid complaints from state workers that the contract-a $15.4 million application–development deal with Indiana's Department of Workforce Development-cost public–sector jobs. The move came after Gov. Joseph Kernan created a procurement policy called Opportunity Indiana to try to keep work in the state and give local businesses more time to respond to proposals. "Given that we were a couple of weeks into a 24–month contract, it made sense that we tried to follow the new procurement policies," department commissioner Alan Degner says.

Outsourcing and offshore efforts can cut costs. But as companies and government agencies dive deeper into such efforts, they realize it isn't easy money. "You need to have very strong quality–control and project–management capabilities in place before you should consider this, and a lot of firms lack that capability," says John McCarthy, an analyst at Forrester Research.

Even so, McCarthy maintains that by moving work to India, companies still can cut IT labor costs by as much as 40%. But a study Gartner's people3 unit released in November concluded that more than 18% of companies it surveyed didn't save money from outsourcing, whether onshore or offshore, while more than 9% saw IT costs rise. Lily Mok, a senior consultant at people3, says many companies don't realize that managing outsourcing relationships can cost up to 15% of the contract value.

Despite some backlash, McCarthy says he sees no slowdown in the rush by businesses to take advantage of low–cost labor in emerging economies, calling the moves by Dell and the state of Indiana "hiccups in an irreversible trend." A report research firm IDC released two weeks ago concluded that 23% of IT services will be delivered from offshore centers by 2007, compared with 5% in 2003.

Dell, which had IT development in eight countries, is committed to expanding operations in India, the spokesman says. Indiana state Sen. Jeff Drozda, who sponsored a bill that would prohibit state agencies from using offshore labor, says it's his understanding that TCS will be allowed to compete for the Workforce Development contract once it's opened for rebidding. "The contract was canceled because someone was looking for short–term political cover," Drozda says. "There won't be any real change unless we enact legislation."

Offshore–outsourcing advocates say states need to use the lowest–cost labor available to help close deficits such as the $760 million budget gap faced by Indiana.