Yahoo.com TechTarget

June 24, 2003

Offshore outsourcing becoming 'in' thing for CIOs

Paul Gillin, VP Editorial

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.

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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