Reshuffling the Outsourcing Deck

By Robert McGarvey

(Back to article)

Lower costs, better results. There’s the four word outsourcers’ mantra and, inevitably, what this means in tough times is companies are on the prowl for more, for less money, from their outsourcing partners. And that just may mean new geographies emerging as prime locations.

One reality: India remains the hub for most U.S. outsourcing initiatives, said David Etzler, CEO of trade show producer Outsource World. “But most large outsourcers are also now looking beyond India, too.”

Consulting firm Hackett’s Chief Research Officer Michel Janssen elaborates: “India is a proven player" and a sad lesson learned in outsourcing 1.0 was that the lowest priced deal wasn’t always the best. As outsourcing 2.0 matures, said Janssen, companies recognize that bidders low balling India still might not be better. Not when work quality, dependability, and the rest of the criteria get factored in.

“With other locations there are risks involved,” said Janssen.

The other reality: so much IT work is about to be outsourced by companies seeking to achieve deep cost savings India won’t be able to handle it and more geographies necessarily will come into play. Hackett estimates that roughly 15% of U.S. IT work is performed offshore. In the drive to cut costs, Hackett sees that percentage gaining by roughly half just in the next two years. "We believe 21% of IT will be globalized within two years,” said Janssen. He adds that a similar gain in outsourced financial sector work―simple accounting, invoicing, collections―is in the offing. "We see finance outsourcing 21 percent of its work within two years, up from 10.5 percent today.”

That dynamic means that, despite the recession, phones are ringing loudly with new orders at leading outsourcers. Then there is the―surprise―non-starter of another locale once thought to be hot. “We just aren’t hearing that much about outsourcing to Eastern Europe these days,” said Etzler, and that is a major change from three-to-five years back when many companies were eye-balling possibilities in Russia, Ukraine, and the Baltic republics. No longer apparently. The experts indicate they don’t know why Eastern Europe has fallen off the outsourcing grid, just that it has.

What about China? Nobody counts China out for IT outsourcing but persistent cultural issues (consider the suicide of a worker in Apple’s iPhone factory in Shenzhen last July) have kept China out of the fast-track for outsourced white collar work.

Beyond China and Russia, however, just about any other place might be "in" as a world-is-flat search for quality work at the right price is breaking down borders. Consider Bogota, Colombia where, said D. J. Edgerton, CEO of New York-headquartered website development company Zemoga, his team of 80 are building websites for worldclass companies such as Toyota, Sears, and K-Mart. Narco-trafficking is out in Colombia, building a middle class is in. And labor costs for U.S. companies that go to Colombia are remarkably low. Edgerton said money is why the work goes south of the border. “Costs, salaries in particular, are one-third to one-fifth of what we would pay in Manhattan.” He claims he hires first-rate HTML coders at $10,000 per year.

Lower costs also drew Ken Moss, CEO of software developer One Software, to Hanoi in Vietnam, but that was after he’d tried Beijing, looked in India, and contemplated doing the work back in the good ol' USA. But Hanoi is where Moss now uses 40 people to write the custom apps for One Software’s clients. “It’s deep in the Vietnamese culture to work hard,” he said.Maryland-based Inflection Point Systems, a software development firm, looks closer to home―choosing to outsource to Monterey, Mexico, where around 65 people are working on projects, said Gerardo Montemayor, Inflection Point’s CTO. Montemayor pegs the cost differential at 50% and, he stresses, in Mexico his operation has lower turnover (“single digit”) than is typical among U.S. software developers.

In every case, however, these pioneering U.S. companies stress that the key to creating a high-performing far offshore unit: work with a good, trustworthy partner.

One issue in going to an exotic location: it’s not easy to scale up staff swiftly. In Hanoi, for instance, Moss thinks the human resources are there for him to bump up to perhaps 200 software engineers. “After that, it gets questionable.” Similar caps apply to all the newly emerging outsourcing hotbeds, from Chile to Pakistan. Only India has what appears to be inexhaustible human resources.

One last advantage to looking to off beat locales―it's very sexy, said Zemoga’s Edgerton. “It certainly is sexy to say, our site was built in Colombia,” he laughs. Ditto for Hanoi or Mexico. Once upon a time, yes, Bangalore was cool, but now the exotica stakes are ramped up and if you want the admiration of peers, go to a location that hasn’t been featured in Travel & Leisure Magazine ... Yet.

As a busy freelance writer for more than 30 years, Rob McGarvey has written over 1500 articles for many of the nation's leading publications―from Reader's Digest to Playboy and from the NY Times to Harvard Business Review. McGarvey covers CEOs, business, high tech, human resources, real estate, and the energy sector. A particular specialty is advertorial sections for many top outlets including the New York Times, Crain's New York, and Fortune Magazine.