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Diversification is key to outsourcing strategies

Limiting your offshore outsourcing to one country increases your risk of failure.

SAN DIEGO -- The offshore outsourcing train has left the station, and U.S. businesses had better get on board or...

risk losing competitive advantage. In fact, visionary companies are developing global outsourcing strategies that parcel offshore work to suppliers on multiple continents, achieving cost advantages while minimizing the risk of localized disruptions.

That's the advice Gartner Inc. outsourcing analyst Rita Terdiman gave attendees at the analysis firm's conference here this week. Calling offshore outsourcing an "irreversible long-term megatrend," Terdiman said that U.S. customers' high satisfaction with offshore suppliers combined with aggressive new policies by many foreign governments to attract IT work will present users with attractive new outsourcing options.

The advantages are so overwhelming that [short-term political] barriers will be overcome.
 Michael Fleisher
CEO Gartner

The global outsourcing picture is changing almost monthly, as new countries get into the game. Pakistan, Brazil, Chile, the Philippines and Ghana are some of those that are becoming players in the market. Terdiman advised buyers to choose a mix of sources from different geographies to enhance flexibility and avoid localized disruptions. There are also big cost savings to be had in emerging geographies, she said.

And users are responding. Despite a recent frenzy of negative media coverage and protectionist government activity, Terdiman said, U.S. businesses are scrambling to move production offshore. She cited one Gartner customer who recently asked how his company could quickly move 3,000 jobs offshore because its competitors had just done the same thing. "It's an arms race," she said.

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The theme of offshore outsourcing was front and center at Gartner Symposium ITxpo this week. In opening remarks, Gartner CEO Michael Fleisher advised U.S. businesses to ignore protectionist leanings and adopt offshore outsourcing as a way to streamline their operations.

"Over the next several years, business process outsourcing will be the fastest-growing segment of the IT industry," Fleisher said. "The advantages are so overwhelming that [short-term political] barriers will be overcome."

India remains the destination of choice and will probably be the offshore outsourcing leader for many years to come, Terdiman said. However, interest is building in China, where an educated work force, stable government and a growing economy present an attractive climate. Northern Ireland and Canada also offer good outsourcing opportunities, and Russia is coming up the learning curve.

Emerging "near-shore" outsourcing opportunities include Mexico, the Caribbean and Brazil, she said.

In many cases, offshore vendors are benefiting from favorable government policies. "I think you're going to see a great deal of passion and commitment from India and other countries," Terdiman said. "This is a path toward building a middle class for them, and they're very proud of their accomplishments."

Her favorable comments were echoed by one attendee, an employee of a global manufacturing firm that has more than a dozen offshore locations. The attendee, who asked not to be identified, said he recently listened in on calls to the firm's Indian contact center and was "blown away" by the quality of support. "I was amazed at how attentive the [Indian] employee was," he said. "It seems that, in the U.S., our attitude is to get the caller off the phone as quickly as possible. These people really wanted to solve the customer's problem."

Terdiman said users are seeing the biggest payback by outsourcing business processes, contact centers, testing, quality assurance and research and development (R&D). However, she cautioned that outsourcing mission-critical functions like business processes and R&D also carries significant risk, if handled improperly. That's why users owe it to themselves to scope out offshore partners carefully, being mindful that no contractor can do it all.

She said that the most desirable offshore partners should offer a combination of global delivery, relationship management and industry or process expertise. Most of the top firms provide pretty good global delivery but are weak in one of the other two categories, she cautioned. Major systems integrators in the U.S., for example, are generally good at managing client relationships but lack in-depth technical skills. Indian contractors, in contrast, are often strong at process but don't manage customer relationships very well.

"Increasingly, the focus will be on what kind of value chain can these guys provide you," the analyst said. "Don't base your decisions just on cost savings."

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