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Offshoring: Improved processes now more of a draw than cost savings

At the CTO Leadership Forum held recently in New York, CIT Group CIO Michael Baresich said wage savings is less of a driver in offshoring than it used to be. Maturing markets are offering CIOs other opportunities.

NEW YORK -- Offshoring doesn't bring CIOs the cost savings it once did. But that's OK because maturing offshore partners are offering them new capabilities that are just as valuable.

What you find is a little less cost savings than you had in the '90s, but vastly improved processes.
Michael Baresich
CIOCIT Group Inc.
"I think over time, the [offshoring] industry, certainly in India, has matured considerably. And what you find is a little less cost savings than you had in the '90s, but vastly improved processes," Michael Baresich, CIO of CIT Group Inc., told attendees at Argyle Executive Forum's CTO Leadership Forum, held recently in New York.

In a conversation entitled "Offshoring 2.0: Assessing the landscape of the flat world" with The Wall Street Journal staff writer Christopher Rhoads, Baresich said the opportunity for wage arbitrage is still available to CIOs in the developing world, but salary growth in those countries is leading to more modest cost savings than 10 years ago. Whereas once companies could achieve a 5-to-1 savings in labor costs by offshoring, now the savings are just 2-to-1 or 3-to-1.

But Baresich said this loss in savings opportunities isn't too steep a price to pay for the other advantages that maturing offshore service providers offer.

"We found ancillary benefits to wage arbitrage, including access to deep pools of labor so that you are able to ramp up quickly," Baresich said.

He said high-quality offshore operations can also help organizations develop a "follow the sun" approach, in which projects are constantly being handed off across the globe.

"The offshore operation becomes part-and-parcel of what you want to do, and you wind up with a whole series of benefits which you may not have anticipated. If you work your communications right, you can get a 24-hour production cycle going where you're giving work to the offshore team as your onshore team is going home."

Baresich said offshore partners can also allow CIOs to keep their costs variable. They can ramp project teams up and down more easily than they can with onshore staff.

As offshore markets such as India mature and offer more sophisticated benefits to CIOs, companies will become reluctant to chase savings in countries that offer even cheaper labor.

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"I think you'll find over time as you integrate these offshore operations well with onshore operations, you're going to be a little more reluctant to move [to another country] just to enjoy a couple more dollars an hour," Baresich said.

David King, CTO for telecoms at LogicaCMG, a British telecommunications, IT and management consultancy, said his company's initial goal with offshoring application management and product development was cost savings.

"But it was always done with the understanding that there would be more than cost savings," King said. "Five years ago we could reduce the prices we brought to market [with offshoring], but it was done with the view of having greater flexibility, and workforce and skill development."

King said his company now has its own 1,500-person shop in Bangalore, India, that it coordinates with other global locations to allow LogicaCMG to adopt the "follow the sun" production cycle. This is particularly important to his telecommunications division, whose customers require support 24-hour support.

Let us know what you think about the story; email: Shamus McGillicuddy, News Writer

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