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IT services firms eye foreign labor

Companies offering information technology outsourcing see lower-cost foreign labor as a key to growth in 2003, market research firm Gartner Dataquest says.

Companies offering information technology outsourcing see lower-cost foreign labor as a key to growth in 2003, market research firm Gartner Dataquest said Thursday.

Gartner also said the number of IT infrastructure outsourcing "megadeals"--those worth $1 billion or more--rose from nine in 2001 to at least 14 in 2002.

"Despite concerns that megadeals in outsourcing were drying up, 2002 saw an above-average number of contracts worth $1 billion or more," said Bruce Caldwell principal analyst for Gartner Dataquest's IT Services program.

IT outsourcing--in which one company hires another to take over such tasks as managing a data center or handling tech-support requests--has emerged as a rare growth area in a sluggish overall IT spending market. But with Indian IT services companies such as Infosys Technologies and Wipro Technologies beginning to challenge their U.S.-based counterparts, American businesses such as IBM and Hewlett-Packard have started setting up shop overseas. Workers in countries such as India and China have relatively high education levels but receive relatively low pay.

Gartner said Thursday that its November 2002 survey of 36 outsourcing companies showed that "offshore application management," or providing such management from an overseas office, was ranked as the highest-growth service opportunity in 2003. Application management means overseeing business software such as SAP or Oracle systems, and includes tasks such as fixing bugs and installing upgrades.

The second-highest ranking growth opportunity for U.S. IT outsourcers was "near-shore" application management, Gartner said. Near-shore refers to operations located in countries such as Canada or Latin America. Besides using offshore facilities for application management, companies are adopting the strategy for business-process outsourcing--which involves handling tasks such as billing and call center operations--and IT infrastructure management, Gartner said.

Offshore outsourcing accelerated in the past year and will continue to accelerate in the next two years, Gartner said.

Gartner said U.S.-based IT services companies will look to forge more partnerships with their foreign counterparts, as well as acquire such companies outright. Allie Young, chief analyst for Gartner Dataquest's IT Services program, said some large U.S. service providers have already set up their own offshore capabilities through acquisition or alliances. But Canada also will look attractive, she said.

"As an alternative to Indian offshore, the near-shore outsourcing market, in particular the Canadian provider market, will be considered by global providers as a way to hedge their bets against political unrest and the potential calamity of a regional war in the Middle East," Young said.

The push to send IT work overseas has prompted a technology worker advocacy group, WashTech, to call for a congressional study of the trend. Shifting high-tech jobs offshore also prompts questions about the long-term technological leadership of the United States. Proponents argue that the U.S. work force will be spurred to develop more cutting-edge skills, and that high-end work will remain in the country.

Not only are companies interested in the offshore approach, they're also increasingly willing to sign up for massive IT outsourcing deals. In 2002, there were at least 14 megadeals worth a total of $28.4 billion compared with nine megadeals in 2001 worth a total of $15.1 billion, Gartner said. The research firm added that there are at least four pending megadeals worth an estimated total of $15.3 billion.

IBM garnered most of the megabusiness in 2002, according to Gartner. IBM won seven of the 14 megadeals awarded in 2002, and shared an eighth deal with Keane, Gartner said. Computer Sciences landed one megadeal, and Electronic Data Systems won two deals, but both were in final discussions for several, separate megacontracts, according to Gartner. HP and Fujitsu landed their first megadeals, and CGI landed its third, Gartner said.

According to a Gartner analysis of 12 years of megadeals, EDS and Computer Sciences were early leaders in the field, but IBM surpassed them. Big Blue now has a total of at least 32, almost as much as EDS (21) and Computer Sciences (15) combined, Gartner said.