The New World Order: Offshoring Today

Remember when offshoring was synonymous with wild cost reductions and exploding profits? Ten years ago, it was common to hear of companies slashing costs by opening offshore arms. Indeed, India-based solution providers including Cognizant and Tata have profited handsomely by offering U.S. companies offshore services at bargain prices. However, with recent reports of salaries increasing in countries such as India, the savings are more subtle. Yet companies are still sending certain tasks " like call centers and software development " offshore, and they are adding jobs, such as knowledge processing, to the mix as well.

Why? Today, it's not (just) about saving money. VARs are using offshore centers in India (expanding from Bangalore into more rural regions) as well as Latin America and China in an effort to establish a global presence for themselves and their customers in those countries. They are proceeding more deliberately, with their sights set on gaining a toehold on new markets and taking advantage of a ready, educated and eager workforce.

There is no question that offshoring is here to stay, but it is evolving. According to Plunkett Research, global outsourcing revenue this year will hit $450 billion; seven percent of that will comprise contracts worth more than $1 billion. But there is a change in the approach: new locations are under development, strategies are changing and different capabilities are being employed. With that comes the need to address new challenges -- such as increasing salaries -- as well as keep the old ones "- such as language barriers -- in check.

New Locations

The colossal potential of markets such as China and Latin America, as well as India, is not lost on solution providers. "It's important to understand the value of moving this business offshore," Paul Schmidt, partner and practice leader of application development and maintenance and global services delivery/advisory services at TPI, a sourcing advisory firm, says. "It's all about getting a toehold in emerging markets."

However, getting into those markets is not as simple as sending products overseas: Many local governments want " and require -- U.S. companies to have a real presence in these countries.

"Part of [the product's or services'] delivery has to be in that country," says Schmidt. "Governments like to see a business as part of the fabric of a country and see employment from within the local base."

Companies are viewing China and Latin America as expansions of their customer base, not just a way of getting product made inexpensively for export back to the United States. The ready-and-willing workforces in these countries are also the consumers.

"Some people in the U.S. speak from a blindered view. The U.S. is not the world's only consumer. That's kind of a parochial view," Schmidt says. "Companies are realizing that part of their delivery has to be within the country of origin."

So countries are looking to new geographies to expand their reach. Earlier this year, TCS, for example, opened its Mexico Global Development Center; the solution provider has more than 150 clients and in excess of than 5,000 professionals in 14 Latin American countries. The center is strategic for furthering its success in the United States as well as for forging new markets in Mexico and Latin America. China is also in the mix.

"Outsourcing in China is now pretty much accessible to everyone," says Dean Stevens, general manager, U.S., for Symbio Group. Symbio provides application development services from China. "Even before a company is even born, the founders are calling me because they know they need a presence in China. Right now, there are two of those [types of companies] we are working with. They say, 'We can't raise funding without articulating a global strategy, we need China and Northern Asia.'" Primarily, that's because investors want to see trim labor costs from the get-go, he adds.

Next: Different Strategies

With the evolution comes a more cautious attitude toward offshoring overall, says Michael Kirven, co-founder of Bluewolf, a provider of on-demand software (CRN Fast Growth 100 rank: 59). Solution providers, and their customers, want to expand their global reach, while employing sound fiscal strategies. Some companies have suffered the consequences of poor communication, time zone conflicts and bad project management. For them, that means keeping at least some work stateside that five years ago might have gone offshore.

"The way companies are viewing offshoring nowadays there is a tremendous backlash," Kirven says. "On paper, things seemed great: You got a 40 percent decrease in cost. However, the savings were significantly lower. Companies had to go through multiple iterations, often because of communication problems, that wouldn't have had to be done if the work was done here."

The United States potentially could see a drop in offshoring, according to Kirven, noting a trend toward companies wanting to hire onsite employees. "They want people they can see and touch. They are starting to become willing to spend a little more get their teams onshore," he says.

Some companies are moving away from traditionally high-tech centers such as Bangalore and moving to China, Latin America and more rural regions of India. TCS' Bagchi acknowledges that, on average, Indian wages have increased 15 percent in the past year, compared with 3 percent in the United States. But, he adds, in Latin America and Brazil, the workers are still 15 percent more expensive than in India. Obviously, that's still only a fraction of the cost of U.S. engineers. "Sure, there is significant turnover, and people do leave to go to jobs with better salaries," says Schmidt. "It is a fact that salaries are rising, but they are still 1/10th that of other locations."

For example, a senior software engineer in India earned an average of $11,400 (U.S.) last year, according to Payscale Inc., of Seattle, which collects salary information. Meanwhile, the median income of a U.S. software engineer is roughly $100,000, according to the latest IEEE-USA salary survey. However, the evidence that salary inflation has begun has led some to look toward China for cheaper labor, as well as for market share.

How much can they save? That varies based on how they carve up the work, and how sophisticated the required process is. But starting up in China will cost 20 percent of what companies spend in the United States, Stevens says, explaining that larger companies can save even more " sometimes seeing only a tenth of U.S. costs -- due to economies of scale.

And those economies are not lost on the shops already set up in India " which are now looking at expanding into China. For example, TCS, with partner Microsoft, earlier this year launched an IT outsourcing company in China. However, from Kirven 's perspective, solution providers should proceed with caution.

"We've been hired dozens of times to undo spaghetti code that comes back from IndiaYou get what you pay for," he says. "It's hard enough to do this job when everyone's in the same room. Companies are seeing the value in bringing people in full-time, giving them security and jobs, and getting it done the old fashioned way."

Next: Different Capabilities

Companies are looking at using offshore facilities for different capabilities, often those that do not require spoken language. Take knowledge processing outsourcing (KPO). KPO often is used to help companies enhance or create abstracts, edit scientific manuscripts, and research and analyze legal briefs. Popular in India currently, the industry is expected to reach $16.7 billion in revenue in 2010-11 (which is equivalent to an annual growth rate of 39 percent during the next four years) and to employ approximately 350,000 professionals globally, according to a recent report by research firm Evalueserve.

"Globally, we can go and get help today from anywhere, as long as you have a methodology," says Evalueserve chairman and co-founder, Alok Aggarwal. He adds that prices are significantly lower for KPO services offshore: "A research report might cost $10,000 to $15,000. That's 50 to 75 percent less than in the United States."

Those are tasks that do not require interaction back in the United States, where language barriers have long been a thorny issue. What's new, however, is that sometimes, language issues can be solved by outsourcing.

"We have call center service in Guatamala now," says Todd Cameron, head of Capgemini Group (VARBusiness 500 rank: 7) AOS Service Delivery Management. "Price plays into it, but we did it also because there is a growing Spanish-speaking population in North America that we can service this way."

An early offshoring benefit for some companies was the ability to work round the clock. But that 24/7 system doesn't work for every business. If you need to interact with employees, time zone differences are hugely inconvenient. For an asynchronous process, increased productivity results, for a synchronous process, frustration is the end product. For that reason, along with the language benefits, Latin America is increasing in popularity among firms choosing to offshore. Companies get a large, educated workforce at a low price point, and in the same (or very close) time zone.

"Our centers in Latin America speak Spanish and Portuguese. Our new center in Mexico serves not only that country but also U.S. businesses that have a need for Spanish-language services," Bagchi says. "It can also serve as a 'near-shore' center for U.S. companies because of its English capabilities, and it is in a more favorable time zone than our centers in India."

End Game

Though companies are still in the offshore game, there is no question they are evaluating how and why they are going about it. Cost gains are slowing, and, in response, companies are looking to new locales. According to a recent report from Diamondcluster, a majority of offshore buyers (64 percent)—remain committed to increasing their purchasing, but those numbers represent a significant decline from prior years.

The past decade has seen the offshore trend evolve from primarily one the enabled massive cost cutting to one that provides maximum flexibility. VARs are using offshore centers can provide their customers round-the-clock service, language-specific services and global presence. Moving forward, offshoring will seen as one of many tools in a company's quest for profitability; other companies may choose to hire fewer employees in-house. Those requiring a global footprint may also opt for offshore capabilities.

Though the reasons for it are changing, offshoring certainly is here to stay. According to Plunkett Research, global outsourcing revenue this year will hit $450 billion; seven percent of that will comprise contracts worth more than $1 billion. In a constantly growing marketplace, it seems global opportunites are boundless.

The key is to leverage resources most effectively, whether that means heading offshore or hiring in-house. "It's a business decision as to how you cultivate relationships. Fortune 200, high-end companies, can be wildly successful chasing cheaper labor," BlueWolf's Kirven says. "But midsize companies [may not] see the risk worthwhile."