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IT offshore outsourcing deals being re-evaluated in weak economy

Large companies are finding that in light of the weak dollar, the tradeoff in flexibility at IT and offshore factory sites isn't always worth it.

IT offshore outsourcing remains steady at most large companies, but the weak dollar and service issues are causing some CIOs to reconsider their outsourcing deals. And that's not all -- loss of flexibility and control can also be factors.

In a tough economic environment, flexibility definitely becomes more important. Executing change orders, modifying manufacturing orders or altering marketing pitches delivered during telephone contacts are all more difficult when the work is outsourced. "You don't have the luxury of saying, 'Come on team, let's go!'" explained David Rutchik, managing partner at Pace Harmon, a Washington, D.C., consultancy that specializes in outsourcing issues.

It's not a stampede back to the mainland, more a case of weaker U.S. currency giving many companies pause before they make the decision to engage in IT offshore outsourcing deals. The weak dollar is becoming more of an issue, Rutchik noted. In some cases, it's an "either/or" decision when the costs become more even.

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"For example, in 2007 the Indian rupee gained 11% against the dollar, but so far in 2008, it has gained only about 9% so the costs of outsourcing IT functions, particularly contact centers, is about the same. In some cases, it's a wash," Rutchik said.

Canada is another example, closer to home. "With the 30% gain in their dollar, there's no reason to be there. It's better to be in Topeka, than Canada," Rutchik said. And Canadian companies are eager to take advantage of personnel resources in less costly areas of the country such as Nova Scotia.

Contracting more specialized IT outsourcing contact centers is becoming downright prohibitive in some cases. "If you need personnel who speak 15 to 20 languages across a call enter, supported out of Eastern Europe, it's going to cost a fortune," Rutchik added.

Call centers based in the U.S. can also prove more productive for cultural reasons. Rutchik cited an example at Round Rock, Texas-based Dell Inc.

"They were getting a fair amount of pushback from enterprise customers because of their contact centers being offshore. They brought it back in [country] for enterprise customers but kept it offshore on the consumer side," he said. "If it's a corporation, and you're dealing with 5,000 PCs, you want to feel as if you have some affinity with the person you're talking to. They didn't feel they had that with offshore contacts."

Onshore outsourcing an alternative

At The Linc Group LLC, cultural issues of a different sort play into the conscious decision to not engage in IT offshore outsourcing deals. Patriotism is the basis for that decision.

"We're an American company and we refuse to outsource overseas -- even for something like code development that no one would ever see," said Greg Lush, CIO at the Irvine, Calif.-based company, which employs 4,200 people worldwide. The global company, which competes with Aeromark and Halliburton Co., provides commercial facilities management services.

The Linc companies were perhaps the only good thing that came out of Enron Corp. in the long term, Lush said. The Linc Group bought ServiceCo., a separate group of companies that serviced Enron's power plants, only a month before the collapse of the energy giant. It then took two years to "extract" the companies from the Enron carnage to form the current company, Lush explained.

While The Linc Group hasn't turned to offshore outsourcing, Lush's mission is to eventually outsource all IT functions within the U.S. All first-level call traffic is outsourced to TEKsystems Inc. in Hanover, MD. Earlier this year, The Linc Group moved to a co-location model. "We changed to a co-location model for global reach. In the past we haven't had remote data centers globally. All of our international endeavors have been pretty isolated, but now we're going to Microsoft's Small Business Servers," Lush added.

All application development work is outsourced as well. Lush's deep-rooted belief in the intrinsic practicality of IT outsourcing centers on the value of making mistakes. "I believe that everyone makes mistakes, however the person who has made more mistakes is probably wiser. In the case of outsourcing companies, they've made the same 15 on another customer. I want to use that experience," Lush opined.

Big Brother is watching

John Lauderbach, CIO at CCA Global Partners Inc., has also turned to onshore outsourcing, but the model is different. The parent company, based in St. Louis, has 30,000 employees in the United States and Canada. Set up as a holding company, CCA Global owns a cooperative of independent retailers, most of whom are in the flooring or carpeting business. Essentially, CCA Global acts as a huge "Buyers Club" for its retail members.

"The retailers pay a fee to be part of this cooperative and take advantage of our buying leverage. We use our size to increase that leverage," Lauderbach said. CCA Global and its members make money through rebates that come back to them from flooring and carpeting vendors. Because they buy thousands of yards of carpet or flooring materials at the same time, they get huge discounts.

When it comes to outsourcing IT functions, CCA Global plays the role of benevolent "Big Brother." The company provides firm guidance to its divisions when it comes time to look at domestic outsourcing options. "We don't guarantee that they're [the outsourcers] going to be good, but we try to get rid of the bad," Lauderbach said. CCA Global also sets up master service agreements with all of these third parties to make sure each company is legitimate and can provide the level of execution expected by the parent company.

The divisions are responsible for application development at the local level. And the retailers definitely have a reason to make sure their outsourcers get the work right. The applications are then turned back to the central IT department in St. Louis for support -- if they pass muster. "We determine what we'll support and what we won't," Lauderbach said. The central IT office handles sales, general ledger and accounting and hosts the company's more than 200 URLs. Half are password-protected and are targeted at the divisions, offering such services as marketing education, and the other half are used for customers who buy carpeting and flooring from the independent retailers.

Cutting factory costs with IT outsourcing

For companies with manufacturing sites overseas, along with IT infrastructure in support of those factories, the decision to bring work back to the U.S. is definitely becoming more common. This trend is a direct result of the rise in real costs, particularly transportation.

It's better to
be in Topeka, than Canada.

David Rutchik
managing partnerPace Harmon

Swedwood, the industrial group within Inter IKEA Systems B.V., opened a 93,000 square foot manufacturing plant in Danville, Va., in May. "It's easier and cheaper to set up manufacturing operations with extensive automation here. You can have 150 employees in southern Virginia and pay them twice as much as you'd pay 500 employees overseas, and still have lower costs," said Len Capelli, business development consultant for the Virginia Economic Development Partnership in Richmond.

Automation and the ability to take advantage of reuse also figure more prominently, Rutchik said. Pace Harmon recently worked with a Fortune 100 company to consolidate its manufacturing centers and the IT infrastructure around the factories. The IT processes built up around the factories was extensive and meant retooling the database and ERP systems, but it was worth it to the company.

"They wanted to more efficiently utilize their footprint. The goal is to make different types of products in the same facility. They can make incremental changes to a product faster and get more out of their facilities," Rutchik said.


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