Cost, agility prompt offshore outsourcing

Cost pressures and the need for increased business agility are leading a growing number of companies to shift more of their IT work offshore, according to panellists who discussed sourcing issues at the Computerworld Premier 100 conference early this year.

On average, 60 per cent of IT spending now goes to external companies, while 40 per cent goes to staff, said Bart Perkins, the panel moderator and the managing partner at Leverage Partners Inc., a Louisville, Ky.-based CIO consulting firm. Those ratios are going to change, he said, as a growing number of companies turn to offshore outsourcing.

That’s the trend at Agilent Technologies Inc., a Palo Alto, Calif.-based spin-off of Hewlett-Packard Co., which outsources about 35 per cent of its IT work today. Two years from now, the company expects to outsource about 60 per cent of its IT functions, particularly in areas such as application development and maintenance. The reason: seven consecutive quarterly losses are driving the company to reduce costs and become ever more agile in the market, said Marty Chuck, CIO at the instrumentation device maker.

“Eight cents on the dollar [for IT labour in India] is too compelling,” said Chuck, referring to a figure cited by Merrill Lynch & Co. CTO John McKinley in an earlier conference session. Currently, 90 per cent of Agilent’s IT workforce is based in the U.S. and Europe, although by 2005, Chuck sees that ratio “flipping,” with just 30 per cent of the IT workforce remaining in the U.S. and Europe.

Agilent isn’t alone. A few years ago, Northbrook, Ill.-based Allstate Insurance Co. created a wholly owned IT subsidiary in Northern Ireland to help cut IT costs and allow faster response to competitive pressures. Even with a group of 900 highly skilled IT employees there, senior vice-president and CTO Cathy Brune finds herself struggling with whether to shift operations elsewhere.

“Any time you go outside your four walls, there’s risk associated with it,” said Brune. “But if you have a very smart team, you can figure things out and learn from others.”

“We’ll be doing more outsourcing in the next two years,” said George Lin, vice president and CIO at Documentum, a Pleasanton, Calif.-based enterprise content software vendor. Both near-shore and offshore vendors “are becoming more savvy about understanding my unique business,” said Lin. That’s one reason he expects his company to move a growing portion of its software quality assurance and maintenance offshore.

Government agencies such as the Federal Reserve Bank of New York are prohibited from outsourcing any of their work offshore. But that hasn’t stopped the group from developing IT “centres of competency” in different parts of the U.S. by cross-pollinating technology staffers who have different areas of expertise, said Melanie Heintz, IT staff director for the bank. Those moves, she said, have helped “keep staff interests up.”

While offshore outsourcing might be attractive from a cost standpoint, there are wrenching cultural and political issues that IT managers have to iron out with domestic IT employees.

“You have to be honest with people and [tell them] what you’re planning on doing,” said Allstate’s Brune. “It’s also important for you and for them to help them improve” their technical skill sets and business acumen to keep them valuable to the organization.

It’s also important to retain knowledge of certain technologies that are sent offshore, said Agilent’s Chuck. “If you don’t retain some of that knowledge in-house, it’s almost cost-prohibitive to bring it back in.”

For its part, Agilent plans to keep people with business process and project management expertise. In addition, it has opted not to outsource its data centre operations, since a recent benchmarking exercise revealed that Agilent can run its back-office operations more cost-effectively than service providers.

“You don’t have to lay off huge numbers of people” when doing offshore outsourcing, said Brune. “We try to avoid that as much as possible.”

Otherwise, she said, “you lose their hearts and souls.”