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  • CFO.com | US

Offshoring Is Still Going Strong

Despite higher costs in India and elsewhere, along with political backlash, U.S. companies are seen boosting offshore resources by 50 percent over next three years.

Offshoring may be getting less air-time as a political wedge issue this year, but by no means has the practice fallen from favor. A new study, in fact, sees companies increasing their use of offshore resources by 50 percent in the next three years, while cutting costs by up to half through the use of cheaper overseas labor.

Companies often face a choice between offshoring parts of their businesses to foreign firms or using “captive” models, for which they set up their own operations and hire staff in another country. But according to the research by The Hackett Group, both practices bring the same cost-cutting benefits — even if the former tends to be faster and easier to implement initially. Captive programs, though, tend to produce more innovation and better customer service, because companies pick their own people and can more easily monitor them.

“We were surprised with the speed and increase of companies moving forward with this,” says Michel Janssen, chief research officer at Hackett.

Hackett found that companies expect to “significantly” increase their use of offshoring in the next three years, and predicts that by 2010 they will have nearly a third of all their finance staffs in low-cost labor markets. Hackett surveyed 50 companies, with 70 percent having revenues greater than $5 billion.

Others agree. According to consultancy Technology Partners International, this year could be a record year for offshoring contracts, The contracts awarded in the first half of 2008 were worth more than at any time in the last three-and-a-half years, and the volume is projected to grow by 10 percent to $87.4 billion.

That growth represents a resurgence from just two years ago when offshoring had hit a lull in the face of negative publicity and political backlash. Offshoring has benefited from better and cheaper communications technology and companies gaining familiarity with the concept, says Hackett’s Janssen, but rising wages in emerging markets and a weaker dollar — which makes foreign labor less of a bargain — could be obstacles to further growth.

Todd Olson, president of 6th Sense Analytics, which tracks offshoring performance, says that companies still are have trouble with language and communication problems with dealing with overseas workers. Managing large time differences can also waste time and resources as a foreign staff can be delayed for hours awaiting instruction from far away bosses. Moreover, turnover can be painfully high as competition for talent is intense and employees do not hesitate to leave for a better deal when they get some experience.

“The job markets in these places are hot and people are very aggressive and ambitious,” says Olson. “This is their opportunity and you have to accept that people will leave.”

Because of such hassles, some firms have retrenched and have sought wage compromises that have allowed them bring office functions back to the United States. In 2006 AT&T decided to cut its foreign call centers and create 2,000 new unionized jobs in Indiana to provide customer support for its home broadband business. The telecommunications company had been berated by customers who said that their Indian technical support staff was of little help.

Still, despite rising wages abroad, it may be a while before labor in countries such as India costs as much domestic labor. Hackett finds that if India’s inflation held steady at 12 percent and U.S. inflation were constant at 4 percent, it would take until 2021 for labor costs to be equal in the two countries. At that time there would still be a wage gap of nearly 30 percent, yet the “hidden” costs would not make offshoring worthwhile at that point, says Janssen.

According to Gartner, a technology research firm, India remains the top offshore location but China, Russia and Brazil are quickly becoming more credible. Gartner predicts that offshore spending by American firms will grow by 40 percent in 2008 and that European firms will increase spending by 60 percent.

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