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Gartner: Offshore outsourcing horse has 'left the barn'

LOS ANGELES -- Hundreds of people jetted into a $1,000+ conference, held at a swanky hotel in the expensive City of Angels to learn how to save money. Evidently, you not only have to spend it to make it, you also have to spend money to save money. The conference, Gartner Inc.'s Outsourcing Summit 2003, last month drew hundreds of people interested in offshoring IT services to save money -- service providers were there too, curious to hear what customers are looking for. sat down with Rita Terdiman and Partha Iyengar, each a Gartner vice president and research director, to talk about the "irreversible megatrend" of offshoring, when it's a good idea to go overseas, when it's better to stay home, and the direction outsourcing is headed.

Why is India such a hot place to outsource IT services?
There are a number of reasons India is so popular, but one of them is scale. There are many other countries developing niche markets, but they just don't have the scale. Ireland [for example] can do the work, but they're virtually tapped out. The labor pool is so small that they're not going to be talked about like India because they simply can't match in terms of scale. The only two countries that can are Russia and China, but China isn't quite ready. Gartner projections show that by 2007, China will match India in terms of revenue. India has a labor pool and the education system, government support, people who are totally driven to do this, facility with English language, familiarity with U.S. culture. There's a whole host of reasons why India got there when they got there, but at the end of the day, they've got the engineering skills and the scale. What are some of the riskiest?
Complex applications; ones that might not have critical mass, where it may not make financial sense to do it; applications that are broke -- there are a number of characteristics, but those are the ones that come to mind. I saw where an Indian vendor is setting up shop in the U.S. -- one of the Dakotas. Are we going to see some kind of boomerang effect where jobs come back onshore?
Let's say I'm working for General Motors -- just to pick a name out of the air. If I'm an Indian provider, I'm going to have people onsite where GM is; I'm going to have people in India; I might have people in other parts of the world because GM is there, so they're going to want me near their people; and then maybe in the U.S., I'll have an offsite location in an area with lower labor rates. It's a full four-tiered delivery model: onsite, offsite, near shore and offshore. That's really what we're moving to. What kinds of applications are the safest to outsource offshore?
Applications that don't require a high level of user interaction, applications where there's really good documentation, and applications with critical mass. What percentage of savings should a firm expect from offshore outsourcing?
There are so many variables, but I'd say 25%-50%. In outsourcing, not offshore, if your projection is to save less than 15%, then [the rule of thumb is] don't bother because of the cost overruns you could end up paying. For offshore, there are so many complexities that it should be another 10% [of savings] -- unless there are huge numbers involved. If you have a $1 billion IT budget, and you can shave 20% off, that's $200 million -- now you have a different story. Even if you can take 10% off, you might as well do it. You called offshore outsourcing an 'irreversible megatrend.' I guess that means there's no going back?
Yes, and I think large numbers of jobs [in the U.S.] will be lost -- we don't know how many -- and I think there will be a continual furor in the press and in political organizations. When the economy recovers, offshore outsourcing will slow down, but it won't be reversed. If you're in an industry where shaving dollars and cents off of what you're selling is one of the ways you sell it, and all your competitors out there are still going offshore, you're going to be at a competitive disadvantage. If the economy had gotten better a year or two ago, [offshore outsourcing] might have been a short-term, tactical thing, but we're past that chasm now. The horse is out of the barn. How often should IT execs go overseas to check on their providers?
Once a quarter is best, but realistically, twice a year at least. How often should IT execs go overseas to check on their providers?
It's also a good idea to send different people, so you don't have the same ones go every time. Maybe the CIO first, then expand and send some of the other stakeholders. What about issues like political unrest overseas? The nuclear saber-rattling between India and Pakistan several years ago comes to mind. Is that something firms need to worry about?
Political incidents, no matter what country they're in, always have an impact in the short term -- maybe in quarterly earnings because customers postpone their visits, and hence they postpone their decision to buy services. India would have to have a prolonged, much more severe [bout of] unrest than they do now.

That's the whole point of the global delivery model -- these things [political or civil unrest] can pop up anywhere, so hedge your bets, and go global.


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