Offshoring 2006: Beyond Bangalore

Thinking of offshoring next year? A passage to India is almost a given, but the rules are changing.

High-tech manufacturers are gushing about China. Brazil offers the great benefit of being in the same time zone. Russia has a pipeline of talented young engineers and mathematicians. Poland and its neighbors, the Czech Republic, Romania and Hungary, are attracting interest. And watch out for the Philippines.

But what's really happening on the offshore outsourcing horizon? If you are seeking offshore IT services in 2006, chances are great your passage will be to India, an IT powerhouse that despite complaints about rising wages or crumbling infrastructure, captures between 80% and 90% of the total offshore dollars.

"As a head-to-head competitor with India, there is really no one around now," said Ian Marriott, research vice president for Gartner Inc. and author of a recent report looking at 50 global sourcing companies.

Lance Travis, who writes about offshoring for AMR Research Inc., agrees. "Is there an alternative to India? The answer is not really. If you are looking for a place that has a level of maturity -- large companies with sophisticated processes and deep experience in transferring work -- India is really the only one in the IT space," Travis said.

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Setting the table with China

Still, the rules for doing business in the global marketplace are changing. AMR said companies are starting to tinker with the practice of bringing key people to the United States for training. The standard model allows offshore employees to learn at their master's feet, so to speak, and soak in the culture of the company, thereby strengthening the relationship and ensuring a good outcome.

The IT department at Costco Wholesale Corp., one of the world's largest wholesale club operators, is among many companies that has used that model effectively.

"What we're beginning to see is a small number of companies flipping that around, sending the architect and the designer to India for three or four weeks and leaving everyone else there," Travis said. The practice seems to work especially well for work that has to be done quickly. Travis said he's learned of five companies in recent weeks that are successfully using the new model. "We're asking is there a new best practice developing that says, for a project where there is a time constraint, do it this way."

Another trend is the emergence of the hybrid "captive" center, where companies build their own facilities in India, hire 200 of their own employees, for example, and supplement the offshore workforce with twice as many outsourced workers from one of the big Indian IT providers, Travis said.

Gartner's Marriott also noted the growing popularity of the new hybrid facility. The blended model allows companies to scale up or down, much in the same way that companies operate domestically. "It's useful to have that kind of capability in place when you're not really familiar with the country, and you're just getting started," he said.

India competitors line up

Experts agree China, Russia and Brazil are the countries with the greatest potential to compete for India's volume, because they are populous countries, have good education systems and a strong focus now on the IT marketplace. Russia's heritage still deters some companies from considering it, particularly U.S.-based businesses. But established software companies such as Luxoft and EPAM, each with 1,000 employees and a U.S. focus, are turning that perception around. Also, for small, cutting-edge projects, Russia may prove less unwieldy than India.

When Deutsche Bank was looking for an offshore partner to grow a cutting-edge customer relationship management system, the company's first inclination was to go to India, where it has major outsourcing operations. But Daniel Marovitz, managing director and COO of Deutsche's eGCI Group, found it difficult to get traction in a market where ramp-up times can stretch to nine months. "What we realized is that in India there is so much overhead cost, because of communication, because of travel, time zones and, frankly, culture. If you're only looking to do something small and you don't know how fast it will grow, it is almost impossible to get something going and have it be successful," Marovitz said. Deutsche ended up going to Luxoft, taking advantage of the company's solid ties with the universities and ability to attract top young talent.

Another critical ingredient to the project's success is the back and forth between London and Moscow offices. The three-and-half hour flight from London means that Deutsche managers are in Russia every 60 to 90 days, for three or four days at a time, and members of the Luxoft team often visit the bank, where they are treated as Deutsche employees, Marovitz said.

Another big change Gartner sees is that companies are starting to look offshore for the classic American specialties: productivity gains and innovation. "Companies understand there are cost benefits in taking work overseas. Now they're asking what other benefits are there. So they are looking for greater levels of productivity and better access to skills, " Marovitz said.

Who's offshore? According to McKinsey Global Institute, U.S. companies employ more than 900,000 offshore service workers, and the numbers are ever-increasing. Gartner estimates that offshore spending on IT services will reach $50 billion in 2007. By 2008, more than 2.3 million offshore service workers will be employed by U.S. companies, doing everything from developing software to research and development.

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