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IT services companies see hope overseas

A Lehman Brothers conference on the computer services industry focuses on sending information technology tasks offshore, and also looks at the solid IT outsourcing market.

Although this week's Lehman Brothers conference on software and information technology services is being held a few miles from Silicon Valley, much of the talk centers on transferring tech work halfway around the world.

Companies and industry experts who made presentations Tuesday highlighted the growing shift of IT operations from high-cost countries to lower-wage locales such as India and the Philippines.

"Offshore has gone mainstream," said Gordon Coburn, CFO of Cognizant Technology Solutions, a New Jersey-based IT services company with offices in five Indian cities. "We're still in the early stages of this trend."

U.S.-based IT services companies have been expanding their overseas operations in recent months to cut fees for customers, compete with Indian IT services companies and take advantage of what some call higher quality services abroad.

Still, sending IT work offshore can be complicated for U.S. corporations. Issues raised include how to monitor the overseas activity, how to keep far-flung networks secure and how much of the work should be done in different countries.

In a keynote speech Tuesday at the Lehman Brothers conference, Ralph Martino, vice president for strategy and marketing in IBM's services wing, said Big Blue simplifies the offshore choice. Although IBM has facilities in lower-wage places such as India, Belarus and Canada, clients need not worry about where IBM's professionals sit, Martino said.

"We don't ask our customers to manage the geographic distribution," Martino said. "It doesn't matter where our people are to clients."

The Lehman Brothers conference, held at the California seaside town of Half Moon Bay, not far from San Francisco, also revealed hopeful signs for an IT services industry struggling with the aftermath of the dot-com collapse and an economic recession.

Outsourcing--when a company hires another to take over tasks such as running data centers or handling business duties like payroll--is faring well, according to TPI, a firm that advises companies on outsourcing contracts. According to TPI's calculations, the total value of outsourcing deals worth more than $200 million rose from $46.2 billion in 2001 to $50.5 billion in 2002. The number of IT-focused outsourcing deals worth more than $200 million was 63 in 2001 and 44 in 2002, according to TPI. The total value of IT-focused outsourcing deals worth more than $200 million was $38.8 billion in 2001 and $41.4 billion in 2002, according to TPI.

Conference participants differed on the significance of so-called "business process outsourcing,", or BPO, in which an outside company manages various business tasks, including procurement, invoice processing and the like. Much BPO work also is being sent overseas. Eleven of the 68 deals TPI is working on involve business process outsourcing. TPI CEO Dennis McGuire said companies can use a BPO arrangement to improve their business methods and save costs. "We think the industry is very strong," he said. "We're going to see it develop very fast."

But attorney Robert Zahler of the ShawPittman law firm, which also counsels companies on outsourcing deals, suggested BPO has been hyped, with few cases of providers capable of offering large-scale outsourcing of multiple business tasks. "BPO is at this point more anticipation than reality," Zahler said.

There was little dispute, however, on the rapid adoption of an offshore approach for IT work. In this sense, conference participants echoed the findings of recent market research studies. Giga Information Group predicts IT outsourcing to India will grow by 25 percent this year and that companies will demand a component of foreign work in almost every major outsourcing deal during 2003.

A November report from Forrester Research 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 in moving abroad.

Cognizant's Coburn spelled out part of the reason India is so attractive to companies. He said his Indian tech workers are paid about $12,000 a year but billed at $45,000. In the United States, Cognizant's tech professionals earn about $75,000 and are billed at $125,000. About 70 percent of the typical Cognizant team is located offshore, with 30 percent kept at the customer site. Six months after signing an IT services contract, Cognizant can provide its clients savings of about 50 percent, Coburn said.

Cognizant's financial numbers also show its business model to be working. In 2002, revenue jumped 29 percent year-over-year to $229.1 million, while net income soared 56 percent to $34.6 million.