The offshore outsourcing of services, lead by information technology services, is booming. This trend has been transforming the IT industry since it began in the 1990s, when companies enlisted Cobol programmers in India to help them get ready for Y2K. Today, companies are increasingly outsourcing to foreign companies, particularly ones in India, or to U.S. firms with a foreign presence. In fact, the market for outsourcing in India is expected to explode—with its export revenues from IT services increasing from $6.1 billion in 2001 to $50 billion by 2008, says the country's NASSCOM (the National Association of Software and Service Companies). This trend is robust and some even say, irreversible, with outsourced services running the gamut—from call centers to software solutions to business process re-engineering. And India is not the only country to benefit. Ireland and the former East Bloc countries are also successfully exporting their services.

Before joining the growing number of companies who outsource IT or customer relationship services, you should weigh the benefits against the risks. On the plus side, offshore outsourcing is an effective way to cut cost. Savings can be substantial—about 30-40% for companies with call center functions in India, says Brian Huff, an analyst at Datamonitor PLC, a market research firm. That figure could even approach 75%, says Dr. Richard Feinberg, director of the Center for Customer Driven Quality at Purdue University. As for companies outsourcing software services abroad, an average of 40% in savings can be achieved, says analyst Stephen Lane, who wrote the Aberdeen Group report, "Offshore Software Outsourcing Best Practices." Furthermore, if part of the team is local, offshore outsourcing enables companies to operate round-the-clock, speeding up overall delivery time.

Significant cost savings are possible because foreign personnel require much lower salaries than U.S. employees do. An average American engineer gets $75 per hour while engineers in India receive just over $25 an hour for performing the same job as well or better. An American call center employee can demand $12 an hour, but his or her Indian counterpart is paid $3-4 an hour. In addition, IT workers abroad are highly skilled, widening the talent pool from which companies can seek employees and compensate for the IT skills shortage that has plagued the West. "You can find Ph.D.-level people anywhere in the world these days," says Lane from Aberdeen.

However, companies who outsource IT services are also taking on risks. "So much work is going offshore, we're putting ourselves at a substantial (intellectual capital and security) risk," says Linda McInnis, an independent contractor and leader of the hiring initiative at BostonSPIN, a group of 1,200 software professionals. This risk arises from differences in language, politics, culture, regulations and work practices—which can potentially negate the main benefit of offshore outsourcing—reduced cost. These barriers make collaboration more challenging and can thus drive up cost.

Political climate, in particular, is a big source of uncertainty—as the recent escalation of tension between India and Pakistan, its neighbor, illustrates. Although the conflict is beginning to cool, companies must still be wary. "There is a new level of risk in India right now," says Stephanie Moore, vice president and research leader for Connecticut-based Giga Information Group. "The only thing people can do is have valid contingency plans that are actionable and immediately usable." As a result of the political instability in India, more companies will start outsourcing to other countries, especially Canada, China, Mexico, Russia and the Ukraine, she says.

Companies who move call center functions overseas are also risking customer dissatisfaction. Customers who call technical support lines can get frustrated when improperly trained employees or ones with foreign accents make communication more challenging. Several customers have posted their complaints on PlanetFeedback.com, a site for customer service problems. "The techs I had the privilege of dealing with were unintelligible due to heavy East Indian accents compounded by speaking much too quickly for me to understand," says one unhappy Dell customer on the site. However, many believe that reduced cost still outranks this concern. "The cost benefit outweighs the fact that customer satisfaction levels may dip," says analyst Huff.

Another drawback to offshore outsourcing is its adverse effect on the local IT job market. Many out-of-work IT personnel say that they have been unable to find employment for months despite possessing such coveted skills as C++, Java and Oracle. Most of them point to offshore outsourcing as the primary culprit for the dismal job market. According to an updated report released last month by the Information Technology Association of America (ITAA) and Dice, an online recruitment consulting firm, the short-term outlook for American IT job seekers is grim even though the IT workforce in the country has increased by 1% since the start of 2002.

Despite the risks involved and its drawbacks, there is little doubt that offshore outsourcing will remain an attractive solution to many companies. "This is not going away," says Shiek Shah, co-chief executive of Akili, a Dallas-based technology consulting firm. "This train is not coming back to us." To reap the maximum benefit out of this phenomenon, companies must take stock of the risks and develop plans to overcome potential barriers. For example, call center personnel abroad can be trained more thoroughly or even encouraged to view American TV shows to familiarize themselves with the American accent and slang. In addition, companies outsourcing to foreign countries must learn to be sensitive to differences in work practices and culture. And lastly, make sure a strategy is in place. "Long-term strategic outsourcing must be driven by business strategy," says Carol Wyatt, executive director of business solutions at EDS UK and Ireland. "Since business strategy will inevitably change, set up the outsourcing contract for change."

Sources: Offshore Outsourcing is Damaging IT Job Market
ComputerWeekly CW360°, Sept. 23, 2002
http://www.cw360.com

Outsourcing: Expert Advice
ComputerWeekly CW360°, July 25, 2002
Outsourcing in a Nuclear Hot Zone
CIO Magazine, Sept. 15, 2002
http://www.cw360.com

Offshore Outsourcing in India: Is This the Way Forward?
ComputerWeekly CW360°, Sept. 25, 2002
http://www.cw360.com

Who Needs an In-House Contact Center, Anyway?
Kimberly Hill
CRMDaily.com, Sept. 10, 2002
http://www.crmdaily.com/perl/story/19354.html

New Service Challenges Arise When U.S. Firms Move Call Centers Overseas
Crayton Harrison
CRMDaily.com, Sept. 16, 2002
http://www.crmdaily.com/perl/story/19407.html

Is CRM Outsourcing Strictly for Down Times?
Lou Hirsh
CRMDaily.com, Sept. 30, 2002
http://www.crmdaily.com/perl/story/19531.html

Offshore Outsourcing
Demir Barlas
Line56, September 5, 2002
http://www.line56.com/articles/default.asp?articleid=3990