Offshoring - a new time and a new place for your IT? The very extended enterprise takes shape
silicon.com Special Report - Outsourcing Thu 15 May 2003 03:48PM BST
We've all heard the stories about far flung call centres in India or coders in Russia, China and elsewhere working for companies while their UK employees are still tucked up in bed. What, apart from cost, are the reasons for offshoring, and is it just a natural extension of outsourcing? Ben King reports.
Unless you’re a very flashy dresser, with a taste for Savile Row suits, it's odds on that most of your clothes were made somewhere far away – the Far East or South America perhaps, maybe Turkey or Morocco but probably not the East End of London.
Where the rag trade leads, the IT business follows, hot on the heels of steel, engineering and almost every other industry, seeking cheap workers beyond the UK's shores.
It began with application development, in cheap overseas code shops, expanding to call centres, application management and full-scale business process outsourcing. Anything can go. The only limiting factor is size, according to Anthony Miller, research director at Ovum Holway. "There are certain overheads that mean that offshoring is only really practical for large corporates. The smallest deals would still be worth several million pounds," he says.
The market is certainly booming. It was the single growth spot in an IT services sector characterised by flat or negative growth. Analysts Ovum Holway estimate the market for work sent offshore from the UK grew 27 per cent last year from £430m to £545m, and forecast a rise to £1bn per year by 2006.
Offshoring often sits together with that other major trend in corporate IT provision, outsourcing. While some companies have set up their own offshore operations, such as BT's offshore joint venture with Mahindra, many do choose outsourcing as a route to offshoring.
Robin Goad, managing analyst at Datamonitor, says: "The vast majority of offshoring is through an outsourcer and even the do-it-yourself efforts normally involve working with a local partner."
The motivations for the two are not necessarily the same - outsourcing is typically justified in terms of focusing on core skills, or increasing visibility of cost, whereas offshoring has been driven by a simple desire to spend less money.
This is a perception that the major offshore vendors are seeking to challenge, as they seek to move up the value chain from labour intensive coding to full business process outsourcing (BPO) and consulting.
Says Srinjay Sengupta, head of Europe at Indian IT giants Infosys: "The general perception was that cost was a major driver but we've really been able to set a benchmark in cost and quality. We complete 90 per cent of our projects on time and on budget." That's quite a claim for a sector known for delays and cost overruns.
Companies 'offshore' almost anything, from data entry and call centers to application development and maintenance. The only thing that can't really be offshored is the human interaction element, anything that involves what Americans call 'face time' - talking to customers, assessing business needs, studying user adoption, graphic design and user experience testing.
Most of the big offshore providers have a presence in the UK, where client interaction and other 'face-time intensive' work is conducted. Design-related aspects of a project would typically be undertaken through a partnership with an onshore design house.
Getting the full benefit of sending work overseas, however, requires a change in the way companies do business. To make the best of the cost savings of sending work offshore, a client needs to minimise the amount of costly 'face-time' a project requires, which means managing the project at arm's length.
Infosys' Sengupta adds: "It’s a lot less optimal if a client wants to micromanage. In the longer term it's up to us to persuade the customer to leave it to the experts."
India has led IT offshoring revolution for a number of reasons. Labour is cheap there and so are other costs. The workforce is vast, and bar the occasional locking of horns with Pakistan, it's relatively peaceful. A network of six elite technical academies of the Indian Institute of Technology produces a stream of highly qualified engineers. But the key element in India's success has been language.
Indian companies like Infosys, TCS and Wipro have been doing it longer than anyone else and now have long track records and lists of reference customers to reassure nervous newcomers to the offshore world.
India represents 90 per cent of the market, according to Gartner estimates, but the cost savings that have made the country such a success are not guaranteed to last for ever.
Vivek Paul, vice-chairman and president of Wipro Technologies, Wipro's global arm, was recently quoted by the AFP news agency as saying: "I personally believe this cost advantage will fritter away as salary costs go up and, more importantly, as the rupee continues to appreciate."
As the demand for talent grows Indian IT staff are beginning to see wage inflation and onshore companies are cutting rates to defend their market share.
South-East Asian nations such as Thailand and Vietnam are also entering the market, seeking to undercut India. With its vast labourforce China will certainly become a player eventually, though language is still a problem and it remains a somewhat difficult place to do business.
Gartner lists a dazzling variety of nations, from Senegal to Venezuela, which are also looking to export IT services. Oddly enough, the big Indian companies are looking to take advantage themselves and move work to cheaper countries to keep their costs low.
While far-flung nations often offer low costs, the cost of doing business at such a remove can absorb a large portion of the saving. India is five and a half hours ahead of the UK, and 14 hours away by plane.
'Near-shoring' represents in some cases an acceptable half-way house. Companies send the work to a nearby country where costs are higher than the UK but lower than at home, but which is easier to visit and communicate with.
For the UK, Ireland - north and south of the border - is the near-shore location of choice. For the US, it might be Canada or Mexico.
Russia has some extremely talented technologists, many of whom are literally former rocket scientists. Other Eastern European countries are also bidding for business. From a European point of view, these nations are conveniently close and have many workers with excellent technical skills, though language is problem from a UK perspective. Cost savings are not as compelling as India, and prices are set to rise with imminent EU membership.
Recent research by Gartner suggests that once various upfront costs are taken into account the savings available from outsourcing a project to India are actually only in the region of 20-30 per cent for the first two years. This is almost exactly what a study from KPMG estimated would be the saving available on near-shoring a project from the US to Canada.
Whether India remains the top dog or the other countries succeed in stealing its crown, IT is heading offshore for good, says Ovum Holway's Miller: "There are not many things that change the name of the game in the IT industry but offshoring is one of them."