Choosing the Right Country for IT Offshoring

Nov 25, 2003

Sharon Gaudin

It's not always about the money.

At least not when it comes to choosing what country your company should use for its offshore outsourcing.

A group of outsourcing experts, gathered for the recent CDExpo in Las Vegas, sat in agreement that there are many issues to factor in when choosing a country to deal with for IT offshoring work. Sure, it's obvious that corporate executives need to factor in cost. But that's just one factor. The educational level of the country's workforce, social and political problems or advancements, and the number of available workers also factor in.

''It's not rocket science, but it is complicated,'' says Gordon Brooks president and CEO of E5 Systems, an IT outsourcing company based in Waltham, Mass. ''When you think about going offshore, it's not a matter of what's a good deal today. It's a bit of fortune telling. Where will there be an educated workforce in five years or 10 years? What is the good long-term investment? You can't think about now. You have to think ahead.''

Offshore outsourcing is rapidly picking up speed among companies in the United States and England, which account together account for 70 percent of global demand for IT offshoring. Forrester Research, a leading Massachusetts-based analyst firm, predicts that $136 billion in wages, or 3.3 million jobs, will move offshore in the next 15 years. Brooks says that number is low, noting that 8 percent of IT work is outsourced today. He says that number will explode to 55 percent in five years.

The trick, industry observers say, is for CIOs and IT managers to figure out how to make this work most efficiently and most productively for any particular company.

Today, India, China, Russia, Ireland and the Philipines are considered to be hot markets for U.S. outsourcing. India easily leads the pack, capturing a reported 85 percent of the IT offshoring market.

Bargains are to be had.

In the U.S., it costs, on average, $80 an hour for computer programming. In India, that price drops to $22 an hour, and in China it drops down to $15 an hour.

But it's not all a matter of cheap labor and big bonus checks for the IT managers who send the work offshore. That's because it doesn't always work. Gartner, the major analyst firm, reports that an estimated 50 percent of all outsourcing jobs fail.

That failure rate is even harder to swallow when you factor in the public and political backlash against offshoring today. In the late 1990s, when IT was the hottest gig around and there were high-paying jobs to spare, there wasn't as much angst and frustration about the growing number of jobs that were being sent to India and Russia. Then the dot-com bubble burst, the roaring economy collapsed and people started to notice, and resent, the jobs that were no longer here for the taking.

As IT workers increasingly filled unemployment lines, frustration turned to outright anger over offshoring.

So, if corporate executives decide to take the leap, risk the failure rate and the public anger and go ahead and offshore, they better make sure they're taking all the different factors into account.

''The challenge is to understand what the resource is and how best to take advantage of it,'' says Steve Mezak, founder of Accelerance and a few other start-ups, all of which used offshored IT. ''Once you pick that team, start with smaller projects and let the team prove itself. Make sure you split projects across multiple teams so no one team will have full responsibility for a project.''

Brooks of E5 Systems says he splits the different countries into two tiers. India and China are in the top tier with superior educational systems and large pools of IT workers. Canada, the Philipines, Ireland and Russia fall into the second tier -- all with good resources but just not as strong. Other contenders are Canada, Mexico and the Caribbean.

India, long a hotbed for offshoring, remains strong, but is feeling some serious competition from China, which has a larger population -- which means more potential workers.

''India is a poor country but there is a lot of demand for people who know IT and more importantly know the ways of Western companies,'' says Brooks. ''They are hot there and are paid a lot of money, and they have the potential to job hop. That is making it more difficult to offshore there. Right now, we are not seeing those issues in China, and we probably will not for many years.''

Analysts note that India has a proven track record when it comes to offshoring. The country is on the frontline of the global market, providing IT work for half of the Fortune 500, according to Brooks.

China is coming on strong, however, quickly becoming the fastest growing offshoring market in the world. By 2007, Brooks estimates, China's offshoring market share will be equal to or will have surpassed India's.

''You really have to spend time thinking things through,'' says Brooks. ''If you have 600 people and 200 of them are offshore in three years, where do I want those people to be? Think about the political issues; the economies of the country; do they have enough educated workers, and a good education system? Do they have an infrastructure with bandwidth, power grids and telecommunications? Is their government behind this initiative?''

Think about the resource pool, caution several analysts.

Ireland was a hot offshoring spot for several years but so many companies sent work there that there aren't many resources left. Nova Scotia has a good educational system and talented workers, but if a flood of companies send work there all at once, there won't be enough workers or resources to get the work done.

Most analysts agree that major companies should have a multiple-country offshoring policy. It's the old eggs-in-one-basket theory. Send work to China, some to India, some to Canada and some to Mexico. Split up the risk. Weigh the options and pick a portfolio of offshoring avenues.


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