Getting in on IT outsourcing


2006 Outsourcing Summit

Free enterprise is all about gravitating to where “opportunity” is, and in a fiercely competitive market opportunity resides in countries that offer cheap skilled labour. That’s a given. Lou Dobbs tirades notwithstanding, recent market studies forecast runaway growth in offshoring – and IT offshoring, in particular. But it’s not clear that offshoring havens of today will continue to be tomorrow’s preferred destinations.Text

That’s why – Lou Dobbs tirades notwithstanding – tens of thousands of jobs, including IT jobs and projects, continue to be off-shored to destinations with a big supply of relatively cheap, highly-skilled labour.

(Incidentally while offshoring has undoubtedly caused some job loss in the U.S., there’s no evidence it has seriously damaged the American economy. In fact, the U.S. Bureau of Labour Statistics reports that by 2010, as the current generation of baby boomers retires, there will actually be a shortage of more than 10 million workers in America).

Of course, one may endlessly debate the ethics of outsourcing, but that will not stop the phenomenon itself.

The trends are in the opposite direction.

Recent market studies forecast runaway growth in offshoring – and IT offshoring, in particular – over the next few years. “The IT offshoring market will record a compounded annual growth rate of 14.4 per cent and [in monetary terms] will nearly double to US$ 14.7 billion by 2009,” according to analyst firm IDC.

The question now, is not whether IT will be offshored but where to. It’s not at all clear that offshoring havens of today will continue to be tomorrow’s preferred destinations.

Of current favoured “IT offshoring” destinations, India remains one of the most popular. According to an Associated Press report, India controls 44 per cent of the global offshore outsourcing market for software and backoffice services, with revenues of US$ 17.2 billion in the year ended March 2005.

It’s a trend that’s influencing current hiring patterns within huge Indian software services companies – such as Infosys Technologies, Tata Consultancy Services and Wipro Technologies. Between July and September of 2005, Tata Consultancy Services and Infosys increased their staff of thousands by 12 and 15 per cent respectively.

In addition to offshoring, IT software behemoths are investing more in their Indian operations, and increasing the size and scope of their subsidiaries and in that country.

Recently, Bill Gates announced Microsoft Corp. would nearly double its workforce in India to 7,000, and invest $1.7 billion there. IBM has added at least 10,000 Indian workers this year and could employ more than 50,000 Indians by the end of 2006. Accenture, EDS, and other consulting firms are all following suit.

And Oracle Corp., which already has 8,600 employees in India spread over six cities, is looking to hire another 1,400 people there over the next seven months and to expand its operations to nine more cities.

And yet, not all big software firms are cock-a-hoop about their prospects in India. Enterprise software vendor SAP AG, isn’t as enthusiastic.

Oracle’s only remaining competitor in the enterprise resource planning (ERP) space, SAP doesn’t appear to share the notion that India should be the preferred choice for software development.

“India is slowly getting expensive,” rued SAP CEO Henning Kagermann in an interview published in the German edition of the Financial Times.

So large-scale expansion plans in India are not on the cards for SAP (or they’re not telling!). “We have decided to hire a certain number there, and then start looking at other locations,” Kagermann said.

What are those “other” locations? The SAP chief cited China as one possibility.

He acknowledged protection of intellectual property in China is “not like in other countries” but said this would not stop SAP from doing more that country. The number of employees SAP has working on development in China is in the low hundreds, Kagermann said, but it may easily rise to the thousands.

Will SAP invest heavily in software development in China? If so, will that set a precedent that other big software companies will follow?

It’s too early to tell.

But Kagermann’s statement has generated a lot of discussion on blog sites around the world.

Had it been made three years ago, nobody would have blinked. At the time, China’s amazing economic success had sparked a lot of speculation that its software outsourcing industry would very soon offer stiff competition to India’s.

However, this was not to be.

A McKinsey study on China’s software industry published last year indicates that it will be quite a while before that country poses any kind of threat to its continental rival. The study identified several issues with China’s software sector. These include: a fragmented industry that simply lacks the scale to attract top international clients, weak process controls and product management, and very inadequate talent management/employee retention programs.

However, none of these seem insurmountable obstacles. Scale and consolidation would be appear to be the antidote to most of them.

With consolidation, Chinese software development companies would acquire the size, reliability and brand to attract larger and more lucrative projects. That, in turn would make it easier for them to put better process controls in place, provide better training opportunities and retain workers that have the right blend of technical and language skills.

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I’m beginning to sound like Jerry Seinfeld – “People, there are better ways to do this!”

Years of research have shown that close customer involvement in the development process, and co-location of the development team and the customer – if possible – are some ways to ensure success. Moving the development team across the street let alone to another continent is sub-optimal at best. Sure, offshoring is a less expensive way to build systems using traditional methods, but given the current high failure rate of IT projects, it’s simply a way to fail at a lower cost! – Dave Rooney, Ottawa

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