Overseas Will Always Require Oversight

 
 
By Joshua Weinberger  |  Posted 2003-06-01
 
 
 



PDF Download Hiring outside contractors to develop software no longer qualifies as a radical move. The question may not even be whether to go offshore, since cheap labor often makes that an easy call. The real uncertainties to resolve are: What work can you bear to part with? How much faith do you have in the people who will be doing it for you?

Former GE chief executive Jack Welch once famously declared that "70-70-70" would be his company's rule for sending technology work offsite: 70% would be done by outside suppliers, 70% of that overseas, and 70% of that in India.

Sounds like a lot. In fact, India's slice of the U.S.' overseas technology work is on the order of 80% to 85%, according to Aberdeen Group and Forrester Research. But that figure may ebb, as India becomes just one of many offshore options, instead of the clear favorite.

Indeed, India may be a victim of its own success, says Nokia head of planning Hannu Kivilinna. "When a company doubles its resources from one to two or 10 to 20, that's not a management problem. When you double from 10,000 to 20,000, that poses management problems." Even a country of a billion people can only produce a finite number of engineers.

The options for managers like Kivilinna will proliferate as more work seeks more labor in low-cost havens. The total number of technology jobs moving overseas will increase by at least an order of magnitude over the next 10-to-15 years, according to Forrester.

Not that India will wither as a source of programming talent. While India's share of work might shrink, it still will likely have the largest slice of a much bigger pie.

But India is not the only nation where coding work can get done quickly, cheaply and effectively.

In fact, other countries such as China and the Philippines are cutting prices in comparison to India, in much the same manner as India compares favorably against the U.S.

Chinese programming may not yet be as sophisticated, but the Chinese are already able to underbid for the pure coding work that used to be the Indians' bread and butter.

According to Indian trade group Nasscom, in fact, the average pay of a Chinese worker is $13,832 a year. Her Indian counterpart? $15,776.

To claim the savings, Indian firms already have established a few Chinese outposts of their own. That means Kivilinna could wind up hiring an Indian services firm, but getting code from China anyway.

With Chinese firms nipping at their heels, Indian developers such as Infosys and Wipro have begun to climb a bit higher on the value chain, building on their reputations for delivering quality code to engage previous clients on newer—and more lucrative—projects.

The result? Other countries—Poland, Mexico, South Africa—are grabbing what India leaves behind.

Customers, meanwhile, often end up seeking or being offered a blend of services that involves programmers on many shores—even in the United States.

The LexisNexis Group, for example, has had a text-entry contract in China since the early '80s, says Bradley Clark, manager of global resourcing. For more involved work, it turns to four Indian vendors. But LexisNexis also has one in the Philippines—for "a specialized, lesser-skilled area of software engineering."

A few years ago, for any complicated project, "India was really the only choice," Clark says. Even today, for top-flight certification and skills, "all the big guys are in India." Certification, he says, "hasn't played as big a role with the Philippines. You can get the work done, but there's slightly more risk."

In a very real sense, where everyday, noncritical software work gets created may be irrelevant. As James Fridenberg, a vice president for Farmers Insurance Group, says, "I'm blind to anything but quality and cost." Hideto Shimosato, general manager of the Epson Software Development Laboratory, says, "The most important issue is if we can trust the outsourcing company. Does the company keep its promises?" Once the trust is gone, so is the relationship.

Just as relying on one nation is going away, so is relying on just one vendor. Farmers divides its work among three Indian providers, and always looks for two. "We have a two-vendor strategy by design," Fridenberg says, referring to the top two firms in his stable, "to ensure that no one vendor gets too comfortable. We want to leave our options open—it helps balance out the relationship."

Ace Hardware director of application development Jay Heubner, who has one main vendor in India, may be looking to spread out in the future, but only "from a risk-contingency planning perspective," he says. "I've had talks with a company in the Philippines, and we're still doing some meetings with [Indian] competitors—but there would need to be a compelling reason to engage in a knowledge transfer" to a new contractor.

Using overseas programmers for data security projects, though, still needs sorting out. "The whole idea of 9/11 caught us totally off-guard," says Jeffrey Campbell, vice president of technology services and CIO of BNSF Railway. "We realized for the first time that there were things we should have taken care of up front: dedicated encrypted transmission lines; ensuring that all people working on our account had extensive background checks; [and] setting up a 'nearshore' site in Canada" for disaster recovery.

Thanks to exchange rates and government subsidies, AMR Research even notes that a $70,000 programmer can be had in Canada for about $15,000.

So, in some cases, the right shore may not even be offshore.

Expertise Online

www.firmbuilder.com

Collection of outsourcing advice includes a section on offshore. (Free registration required.)

www.offshore-outsourcing.com

Articles (and a forum) addressing overseas options, hosted by outsourcing consultancy Everest Partners.


Group Dynamics

Category: Offshore outsourcing

What It Is: Subcontracting out technology work to third-party providers at overseas locations.

Key Players: Tata Consulting, Wipro, Infosys, Satyam, Syntel (headquartered in India); EDS, Accenture, IBM Global Services, Cognizant, CSC (based in the U.S., but with operations overseas, including India).

Others: Alternative regions are known for different skill sets, and range in terms of cost savings: Russia (complex development), Philippines (business processes), China (low-cost development), Ireland, Romania—even Canada and Mexico (so-called nearshore options).

Market Size: $12B* (2002)

What's Happening: After years of delivering cost savings in low-end development, Indian firms are expanding their offerings. Meanwhile, China's begun to undercut on price, and large American firms see the value of moving in themselves.

Companies in italicized yellow type are featured in Dossiers this month
* Source: Aberdeen Group. includes work done by overseas firms as well as offshore production by U.S. and European Technology industries.