A weak economy is redefining domestic IT outsourcing, but does it pay?

Can domestic outsourcing providers compete with skilled Indian providers and other offshore options? Experts explain why CIOs should do the calculation.

The economic viability of domestic outsourcing is likely to resonate increasingly with CIOs because of issues that

go beyond costs, experts say. One reason is U.S. politicians' concern about high unemployment, said Ron Hira, associate professor of public policy at the Rochester Institute of Technology in New York.

"That [concern] can affect CIOs in a couple of ways. If it is a federal or state contract that they are subbing out to somebody, there will be a preference probably for domestic outsourcing or less risk for backlash," Hira said. "There also will be better tax incentives and other types of grants to make that domestic outsourcing more favorable for the business-case point of view."

In the past, most CIOs and CFOs would say it didn't matter how much training or cultural change the offshore centers required because the labor arbitrage was so great, Hira said. The difference is not as obvious anymore because Indian wages are rising 10% to 15% annually in the face of increasing demand in India for IT services, and attrition levels are high.

Although the sour U.S. economy accounts for some of the renewed interest in domestic outsourcing, the economics of the model don't depend on it, Hira stressed. "It helps to have a weaker dollar and a high unemployment rate for competing with services exports that pay no taxes, but the model stands on its own merits," he said.

IT skills exodus will lead to domestic outsourcing in public sector

Over the next 10 years the biggest consumers of domestic outsourcing will be local, state and federal governments, says Thomas Young, formerly finance director at AT&T Labs and now partner and managing director at the sourcing advisory firm TPI Inc. The recession has delayed retirement for some of the public sector's aging IT workforce, but government employers still expect an exodus of IT skills in the next five years. "They are not able to replace people; nor do they want to," he said, because of the high overhead associated with full-time employees, such as pension benefits.

At private organizations, where cost is not the primary driving factor, domestic outsourcing can be a better choice for numerous reasons, from security concerns to customers who feel more comfortable dealing with a domestic workforce, Young said. For certain kinds of work, domestic outsourcing could prove even more cost-effective.

Like many global companies, Stamford, Conn.-based TPI has an IT service delivery center in India, as well as a center just outside Detroit, Young said. "I'm going to make a general statement: When I deal with the Indian workforce, I have to be very specific about what I want. Ambiguity doesn't work well," he said. "If I have an ambiguous situation, I have to spend a lot of time explaining, and I may have to go through a lot of rework cycles to get it right. Once it is right, it works great, but how do you capture that cost? It is not as straightforward as looking at hourly rates."

You'll get no argument about that from Debashish Sinha, a veteran expert (with stints at Wipro Ltd. and HCL Technologies Ltd.) in IT offshoring and now the chief marketing officer at Systems in Motion, a domestic outsourcing provider. The Silicon Valley-based start-up is determined to challenge the Indian IT outsourcing model with a U.S. alternative that offers hourly rates that are within striking distance of offshore wages, and sidesteps some of the problems associated with contracting IT services half a world away.

The firm advertises that with its centralized delivery model, it can offer IT services at $55 per hour compared with the $47 per hour it claims is the going wage for comparable work by Indian providers. Factor in the added costs of doing business with offshore providers, and the domestic outsourcing model holds more appeal, Sinha said.

Is local domestic outsourcing talent better?

With IT skills in strong demand and a new crop of college graduates unable to find work, Systems in Motion also has a feel-good story to tell. The outsourcing provider, which runs its main operations out of Ann Arbor, Mich., trains newly minted Midwest college graduates to develop cutting-edge technology, including apps for Web and mobile platforms.

In the offshore model, there is a serious disconnect between the senior resources, who are the true experts, and the actual development resources.

Debashish Sinha, CMO, Systems in Motion

The company's location is critical to the success of its model, Sinha said. The area's large public universities ensure a ready supply of trainees. Its proximity to major employers offers a poaching ground for seasoned IT professionals. Unlike so-called rural outsourcing firms located in sparsely populated regions where finding resources is a challenge, Systems in Motion can tap 4 million people living within a 75-mile radius of its location.

A relatively low cost of living makes the location an affordable place to do business. And the area's 17% unemployment rate certainly doesn't hurt Systems in Motion's ability to recruit and retain talent. But the real alchemy of its location, according to Sinha, is the tight integration between its expert architects who design the IT services and the college graduates who are doing the work.

"In the offshore model, there is a serious disconnect between the senior resources, who are the true experts, and the actual development resources," Sinha said. "No matter how much you invest in collaboration tools and conference calls in the middle of the night, it is very difficult to get over the hump."

An agile approach called design-build, where adjustments can be made on the fly, is especially critical in today's enterprise computing, Sinha argued. "As we get to the point where open source technologies are becoming industrial-strength, where cloud computing is taking away much of the requirement for infrastructure management, a lot of the actual technology deployment and management issues center on how well technology aligns with the business and how dynamic the technology is on which the business runs," he said. That kind of dynamic development work is easier for companies to keep tabs on when "you have a delivery center in Ann Arbor instead of Bangalore," he added.

Agile methodologies in outsourcing

An example is prize client Best Buy Co. Inc., an hour away by plane. The Richfield, Minn.-based consumer electronics retailer hired Systems in Motion to build a scalable consumer portal for mobile phone purchasing, activation and support. The team used the agile methodology called Scrum and open source LAMP stack technology in its work, Sinha said.

It is important for CIOs to match the work to the provider, offshore or domestic, said John Beesley, director of business development at CrossUSA Inc., a rural outsourcing provider based in Burnsville, Minn. The firm runs three Minnesota project centers that specialize in complex, high-risk IT work and are staffed by experienced IT professionals who get incentives to stay put.

"When clients ask me, 'Would this piece of work be a good fit for your model?' I say that if the work can be learned in a couple of weeks, probably not, because you're not going to see the real value of no turnover if the work is easily taught," Beesley said.

Systems in Motion's Sinha concurs that it doesn't make sense for CIOs to take everything they do offshore and put it into the firm's domestic outsourcing model. "That would not be cost-effective," he said. The large Indian offshore providers have spent decades perfecting a process-centric approach that delivers superbly on stable IT work, which can be easily taught and therefore is not as affected by high attrition, he added. "When it comes to application development and the management of applications that do change frequently in terms of functionality and underlying technologies, the offshore model does not work as well."

Let us know what you think about the story; email Linda Tucci, Senior News Writer.

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