In-Depth

More hype than reality to offshore outsourcing?

Democratic presidential challenger John Kerry used outsourcing as an issue during this year’s campaign as a way of saying President Bush cared little about the American worker. (Remember Kerry’s attempt to connect it with the war on terror with his charge that Bush had “outsourced” the job of capturing Osama bin Laden?)

As Bush prepares for his second term, what lies ahead for IT outsourcing, especially work that may be headed outside the U.S.?

According to research firm IDC, global spending on offshore IT services will more than double to $17 billion by 2008, up from $7 billion in 2003. Most of the investment will continue to focus on areas of custom application development, app management and systems integration. IDC also sees increased offshore demand for services traditionally limited to domestic providers, ranging from application and infrastructure maintenance to IT consulting, according to David Tapper, who heads IDC’s outsourcing , utility and offshore services research. IDC, based in Framingham, Mass., says India, China, the Philippines and nations in central and eastern Europe will benefit most

A report by Enterprise Systems, an IT media company (and like ADT, is owned by 101 Communications), pours a healthy dose of cold water on the extent of offshore work.

The report, which summarizes the findings of a recent survey of 744 organizations (579 in the U.S.), suggests only about 25% of companies that outsource IT work are sending it outside their home countries, and, although more organizations will probably experiment with it over the next few years, it’s just as likely that many will be dissatisfied with their experiences.

Also, among organizations that had completed their RFP work at the time of the survey, only 16% were planning to ship the work abroad, Enterprise Systems says. “Many companies are offshoring with relatively small applications or services (generally no more than $100,000 of work) and for decidedly finite periods (almost half outsource on a per-year basis), both of which seem indicative of a pragmatic, rather than a steadfast, (approach) to offshoring.”

The most offshored IT function, according to the survey, is application development, cited by about 21% of respondents.

However that doesn’t come without frustration, according to one expert.

Scott Stribrny, president and managing director of Group Atlantic, a management consultancy in Oakbrook Terrace, Ill., and a senior consultant with Cutter Consortium, of Arlington, Mass., says outsourcing clients and suppliers may suffer communications breakdowns, sometimes because of an offshore developer’s lack of sufficient knowledge of its customer’s development processes. That can particularly crop up if a supplier in, say, India, has the highest CMM software development maturity rating (Level 5), working according to detailed processes, and has to work hard to understand the processes of its customer, which are not as mature.

Stribrny calls IDC’s prediction a “reasonable estimate,” although he believes there will be some plateaus over the next four years that can give IT organizations time to learn more about issues involved in offshore outsourcing. One trend he’s seeing today: a rise in relationship management skills training programs for both offshoring customers and suppliers as a way to smooth the rough waters that can come with offshoring arrangements.

Amid the controversy over the short and long-term effects of offshore outsourcing on the U.S. economy, executives apparently have some misgivings about the effect of offshore work on the U.S. economy. “Between the competing claims” of proponents and detractors, Enterprise Systems quotes an executive with a U.S. automotive manufacturer, “I just don’t know what to think.”

However, even if you have outsourced IT work to domestic providers, you may be indirectly sending that work to another country, Enterprise Systems says. For instance, EDS has partnered with IT services provider Satyam Computer Services, of Hyderabad, India, and Deloitte Consulting has a working agreement with iGate Global Solutions, an outsourcing firm with extensive Indian operations.

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