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Offshore outsourcing becoming 'in' thing for CIOs

Attendees at Gartner's Outsourcing Summit 2003 see the advantages in taking some IT operations offshore, but they're not entirely sold on the idea for certain functions.

LOS ANGELES -- Gus Perea's early experiences with Indian outsourcing companies have been positive enough that the Kaiser Permanente IT manager is moving forward with additional projects. "Indian outsourcers are working toward improving their image," said Perea, who is Kaiser's manager of international augmentation. "The old job-shop mentality is going away."

Perea's opinion is evidently shared by many IT managers attending Gartner Inc.'s Outsourcing Summit 2003 conference this week. Attendees packed sessions on offshore outsourcing, saying that they see a lot to like in the cost advantages and increasingly sophisticated services that Indian companies have to offer.

Outsourcers debunk perception they steal U.S. jobs
IT analysts fretted that user opposition to offshore outsourcing is inhibiting U.S. firms from exploring cheaper foreign options, but the concern apparently didn't strike a chord with attendees at Gartner Inc.'s Outsourcing Summit 2003 conference this week.

During a panel with three CEOs of Indian outsourcing companies, Gartner vice president Rita Terdiman repeatedly probed the executives for evidence that they must battle the stigma that they steal away U.S. jobs with their low-cost competition.

The CEOs, however, defended the situation as a consequence of globalization. "This is an unstoppable trend," said Vivek Paul, CEO of Bangalore, India-based Wipro Ltd. Offshore sourcing, he said, "is good for the U.S. economy and something you should support."

And users did not seem particularly alarmed by the political risks of sending work overseas. Asked in an instant poll how press coverage related to job losses in the U.S. was affecting their offshore sourcing decisions, 80% of the roughly 150 respondents said it was having no effect.

In a separate poll, 85% of approximately 200 attendees described their offshore outsourcing relationships as "strategic," with only 11% characterizing them as "tactical."

However, attendees who were interviewed expressed reservations about using Indian outsourcers for much more than the application development tasks for which those companies are known.

"We're going full bore with an Indian-owned company providing services on-site as well as offshore," said Bobby Russell, data center manager at First America Credco, in Poway, Calif. "Indian companies have very talented computer science people."

But Russell said he would be reluctant to outsource call center or other customer contact functions to Indian vendors because of language barriers and time-zone differences. Such barriers are frustrating the attempts of Indian outsourcers to climb further up outsourcing short lists.

An instant poll of roughly 150 attendees at the conference asked which primary area they were considering for offshore outsourcing. Two-thirds named application development, while call center services came in a distant second at 14%.

That doesn't change the fact that the Indian outsourcing business has been growing at a torrid rate of 40% to 50% per year for the last several years, according to Partha Iyengar, a Gartner vice president. "The question [for U.S. companies] has gone from, 'Should we take this function offshore?' to 'How do we scale our offshore expansion?'" he said.

Iyengar noted that the top four Indian outsourcers racked up sales of nearly $3 billion in the most recent 12-month period, and they employ more than 70,000 people. Most are doing two-thirds to three-quarters of their business with North American companies, with 80% of that work in application development and maintenance.

That kind of growth, combined with costs that are as much as 80% lower than those of American IT professionals, has caught the eye of IT managers -- and their bosses. "Everywhere you look, you see another article on this topic," said Howard Ludwig, director of IT at Ispat Inland Inc., an East Chicago, Ind.-based steel company. "The CEO is seeing these articles, too."

"Offshore outsourcing has become water cooler discussion with CEOs," said Eric Rocco, a Gartner managing vice president.

Ispat Inland is looking at contracting some of its application development offshore for the first time, as well as centralizing some shared services that are spread across subsidiary companies. "A lot of our IT work force will be retiring in the next few years," said Ron Glusan, Ispat's manager of technical support. "These are difficult and expensive jobs to replace." Offshore outsourcing could save the steel company money in a cutthroat market, he said.

However, users cited concerns about taking offshore outsourcing too far. Chief among them are language and cultural barriers that handicap the service providers' ability to respond quickly and appropriately to sensitive situations. "Management oversight is required," said Kaiser Permanente's Perea.

There are also political sensitivities stemming from the perception that Indian IT workers are taking jobs away from U.S. workers (see sidebar). And some attendees said they just think certain functions can never be adequately managed from half a world away.

But Gartner analysts said that's changing. "When you call Dell these days, chances are that someone in Indian is answering the phone," said Gartner's Rocco.

Gartner's Iyengar added that he believes the majority of services delivered by corporate IT projects can be handled offshore. The Indian government is helping by mounting a major campaign to coax more North American outsourcing business to India. If the growth in the market continues, "demand for Indian outsourced services will outstrip supply in much less than five years," he said.

Indian companies exhibited at the conference in force. The industry has gone beyond its body-shop roots, they said, and is ready to take its place as a strategic partner. WNS Global Services of Mumbai, India, ran a video in its booth showing sari-clad workers punching keyboards in modern office space. "Customers tell us our offices are nicer than theirs," said Ishan Singh, head of marketing, who added that the company has 55 employees dedicated to quality control.

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