The Politics Of Outsourcing - InformationWeek

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8/29/2002
02:23 PM
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The Politics Of Outsourcing

More than ever, world events affect offshore outsourcing choices.

Imagine being a business-technology manager charged with developing a network, and you have two bids from outsourcers: one for $1.5 million and one for $85,000. Would you take a chance on the low bidder? And if the bargain-basement price came from a relatively new company based in Russia, would you still be interested in the less-expensive option?

That was the question Fubu faced more than a decade ago. At the urging of partner Samsung Electronics Co. Ltd., the specialty clothing maker decided to go with a fledgling Russian company called EPAM Systems LLC, which has offices in Princeton, N.J., but does most of its work in Moscow and Minsk, Belarus.

Fubu took a chance, and the work was "executed beautifully," managing partner Norman Weisfeld says. "We became a $400 million company using this system," with a network that supports 250 users. Since it was built, EPAM has provided a variety of applications. Everything except Fubu's general ledger is developed and maintained by EPAM in Minsk.

The fact that the majority of EPAM's employees live and work in Russia wasn't a major factor in the decision to select the company for the outsourcing deal, Weisfeld says. But he has been impressed with the quality of the work and the loyalty of the IT workers there. "Nobody can dispute the quality of the work in Russia," he says. "We haven't had two days' downtime in two years--and you can't beat the cost."

Like Fubu, business-technology managers thinking about outsourcing need an up-to-date world atlas. A host of new companies--and countries--are trying to grab a piece of the U.S. IT outsourcing business, and picking the right partner has never been more complicated. Terrorism, religious strife, changing governments, the threat of nuclear war, and failing national economies all are issues that need to be considered when weighing whether to outsource overseas.

Many of these issues weren't even on the radar screen a year ago, much less major factors in outsourcing decisions. But in the past year, the world has seen the terrorist attacks of Sept. 11, the threat of nuclear war between India and Pakistan, continued violence in the Mideast, economic problems in South America, and many other developments that could affect outsourced IT work in other countries.

Business-technology managers are paying closer attention to world events as overseas outsourcing companies--still relatively minor players in the outsourcing market--compete for a larger share of the pie. The Aberdeen Group estimates that offshore outsourcing represents about 2% of the $400 billion market for global IT services. But most of the growth is taking place overseas. Most overseas outsourcing vendors report annual growth rates of 30% to 40%, while U.S. IT services firms struggle to meet last year's numbers. Aberdeen says that while 37% of the businesses it surveyed recently say they use more than one outsourcer, only 14% say they outsource to more than one country.

chartThe trend of outsourcing to many places around the world is immature, but it's growing, Aberdeen analyst Stephen Lane says. "There are certain skills in certain places and differing rates--that's what it's about at the end of the day," he says. When shopping for vendors, he cautions businesses to concentrate on what's important. "Companies focus on the country first and the supplier second," he says. "But countries don't deliver services, suppliers do."

India is the clear leader, but its role is still small. All of India's IT work combined came to about $7.7 billion for 2001. In contrast, IT services firm Accenture billed $11 billion for the same period.

India's position as an IT outsourcing leader faced a big threat earlier this year when the border dispute between India and Pakistan grew heated and the specter of war between the two nuclear powers became a real possibility. India has sometimes jokingly been described as the back office for many of America's prominent businesses because of its many outsourcing companies. So the threat of war concerned many U.S. businesses that increasingly rely on Indian workers to develop applications, answer help-desk calls, and provide other types of IT services. War, or at least a serious threat that service could be disrupted, would have provided an opening to fledgling outsourcing firms in countries such as Russia and China that hope to duplicate India's success.

Indian firms were quick to reassure U.S. clients that there was no cause for alarm. Many pointed out that their development sites in Bangalore and Chennai were well out of range of a potential nuclear strike by Pakistan. Fortunately, tensions eased and the threat of war faded.

Northwestern Mutual was one of the businesses worried about the possibility of war. "Of course there was concern," says Phil Zwieg, VP of IS at the nation's leading provider of individual insurance policies. "But that's all in the past."

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