More IT firms look overseas to cut costs

Giga Information Group is forecasting a boom in overseas outsourcing for the information technology industry. India alone will soar 25 percent, the market research firm says.

Ed Frauenheim
Ed Frauenheim Former Staff Writer, News
Ed Frauenheim covers employment trends, specializing in outsourcing, training and pay issues.
4 min read
Market research firm Giga Information Group is forecasting a boom in overseas outsourcing for the U.S. information technology industry.

The research firm

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predicts IT outsourcing to India will grow by 25 percent this year, as companies seek to cut costs and improve quality. IT outsourcing is when a company farms out certain IT operations such as software development or data center management to another company.

Giga expects that companies will demand some portion of work be done in a foreign country in almost every major outsourcing deal during 2003. But Giga analyst Stephanie Moore warns companies to shop carefully for an outsourcing partner and advises against shipping work to the nascent IT services industry in China. "The market is too immature, and the problems associated with this immaturity--the lack of English language skills, the legal and regulatory environment, the lack of intellectual property laws--make China too risky today," Moore wrote in a report published Wednesday.

The report, "IT Trends 2003: Offshore Outsourcing," comes on the heels of other studies reaching similar conclusions. A November report from Forrester Research--which has made an offer to buy Giga--estimated that the number of computer jobs moving overseas will grow from 27,171 in 2000 to a cumulative total of 472,632 by 2015. Forrester researchers predict that other services--including call center services and back-office accounting--will follow IT operations' move abroad.

Giga's report may be good news for company leaders looking to cut costs, but it's ominous for U.S. IT workers. Moore anticipates Global 1,000 companies will continue to replace local contractors with offshore or near-shore IT workers. She also indicated companies using a U.S. outsourcing firm will push the provider to shift work overseas to trim expenses.

Critics of shifting IT work overseas have raised questions about the skill levels of foreign programmers and the effect on U.S. workers. A technology worker advocacy group, WashTech has called for a congressional study of the trend. Shifting high-tech jobs offshore also has prompted 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.

In late January, Gartner said its survey of 36 outsourcing companies showed that offshore application management 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 IT outsourcing 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 an overseas strategy for business process outsourcing--which involves organizations turning over tasks such as billing and call center operations--and IT infrastructure management, Gartner said.

Hewlett-Packard, IBM and Electronic Data Systems all trumpet their ability to serve customers from facilities in low-wage countries such as India, Mexico and Brazil. That strategy is partly in response to the success of Indian-based players such as Infosys Technologies and Wipro Technologies. Indian companies began to take on low-profile tasks like legacy software maintenance in the early 1990s. But they've since graduated to offer more mission-critical services. Some Indian IT companies also offer business process outsourcing services.

Giga's Moore estimated India's business process outsourcing will grow by at least 65 percent this year. The country's sales from business process outsourcing--also known as IT-enabled services--were $1.5 billion in 2001, she said.

Moore also said Mexico in particular is an attractive near-shore option for North American companies thanks partly to its low cost, government investment in the software industry, and the North American Free Trade Agreement. Moore suggested IBM Global Services and Mexican company Softtek could be viable outsourcing partners.

Moore expects U.S.-based IT companies to increase their offshore resources because of the growing acceptance of the value of overseas outsourcing. But, she said, BearingPoint's investment in a China office, for example, will not pay off for U.S. or European customers. "Clearly BearingPoint can service its clients in Japan and Korea from China. However, BearingPoint mistakenly expects its Chinese facility to support mostly North American clients," she said.

Tom Gary, a managing director at BearingPoint, disagreed with Moore's assessment. Questions about language and intellectual property in China "were all ones we raised five years ago about India," he said. China will prove to be a sound place to do business, he added. BearingPoint, formerly KPMG Consulting, has a small number of software developers now working out of China but is investing in a new software development facility in Shanghai set to open in April.

Moore expects Indian providers to offer higher-level IT services such as architecture, design, development and technology strategy services. She also predicts Indian IT companies will expand into other low-cost countries such as China and Eastern Europe, and even acquire top-tier IT services companies such as BearingPoint. A BearingPoint representative declined to comment on that possibility.