A Shore Thing?

Risk and reward have always been major factors in offshore outsourcing. The trick, of course, is to mitigate the former while maximizing the latter.

Not long ago, after FBI agents raided a Massachusetts software company they suspected of having ties to terrorists, calls began pouring into Tata Consultancy Services, an offshore outsourcing firm. Clients, most of them large American companies and financial institutions, felt newly vulnerable: given global tensions — and the prospect of war — did it make sense to have mission-critical applications humming away on computers in India, China, Russia, and other far-off lands?

Arup Gupta, president of Tata’s American operations, assured his clients that his company did thorough background checks on its programmers and that there had never been a security problem. Nonetheless, some corporate CFOs and CIOs are understandably edgy about the risks inherent in going offshore in today’s increasingly dangerous post-9/11 world.

Some argue that offshore outsourcing poses an economic danger as well: Forrester Research Inc. estimates that over the next 12 years, 3.3 million jobs accounting for $100 billion in wages will move offshore. Such statistics have fueled a backlash: New Jersey recently banned offshore outsourcing of state government work, and labor organizations have begun to question the impact of offshore outsourcing on the American workforce.

At the same time, corporations are under enormous pressure to realize the savings provided by having their software development or applications management done in Bangalore or Beijing. “Current economic conditions mean that many companies are struggling to maintain, let alone increase, sales and profitability,” says Atul Vashistha, CEO of San Ramon, California-based outsourcing consultancy neoIT Inc. “So there is a business imperative to decrease costs.” Offshore outsourcing has changed in many ways since Y2K put it on the map, but its economic argument remains compelling.

“Achieving cost reductions is the big nut,” says Kumar Mahadeva, chairman and CEO of Cognizant Technology Solutions Corp., an Indian custom software and services provider with U.S. headquarters in Teaneck, New Jersey. Clients typically expect to cut labor costs by more than 70 percent when they source out programming tasks, and bring in IT projects at 20 to 50 percent below the cost of undertaking the same initiative themselves. Taken together, these savings can add millions of dollars to the client’s bottom line.

Risk and reward have traditionally been the key variables in evaluating offshore outsourcing, but today the stakes have risen substantially on both sides. With war in Iraq seemingly on the horizon, political unrest in the Philippines, and nuclear saber-rattling in North Korea, the “risk model has become larger today,” says Mike Gerdes, research director for I-4, an organization made up of top corporate security officers and managed by RedSiren Inc., an information-security firm. “But there is also a much greater awareness and understanding of the risk factors.”

Offshore outsourcing did slow down in the wake of 9/11, but has begun to grow again. Delta Airlines recently turned over a big chunk of its global reservations systems operation to Wipro Technologies, one of India’s major players in the software and services area. Delta expects to save as much as $15 million, which is not unreasonable based on other companies’ long-term experiences.

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