IT migrating to overseas outsourcing

Date: Monday, February 24, 2003 1:50 PM

H-1B and JOB DESTRUCTION NEWSLETTER

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http://zdnet.com.com/2100-1104-985379.html

IT migrating to overseas outsourcing

By Ed Frauenheim
CNET News.com
February 21, 2003, 6:01 AM PT
URL: http://zdnet.com.com/2100-1104-985454.html

Market research firm Giga Information Group is forecasting a boom in
overseas outsourcing for the U.S. information technology industry.

The research firm predicts IT outsourcing to India will grow by 25
percent this year, as companies seek to cut costs and improve quality.
IT outsourcing is when a company farms out certain IT operations such
as software development or data center management to another company.

Giga expects that companies will demand some portion of work be done in
a foreign country in almost every major outsourcing deal during 2003.
But Giga analyst Stephanie Moore warns companies to shop carefully for
an outsourcing partner and advises against shipping work to the nascent
IT services industry in China. "The market is too immature, and the
problems associated with this immaturity--the lack of English language
skills, the legal and regulatory environment, the lack of intellectual
property laws--make China too risky today," Moore wrote in a report
published Wednesday.

The report, "IT Trends 2003: Offshore Outsourcing," comes on the heels
of other studies reaching similar conclusions. A November report from
Forrester Research--which has made an offer to buy Giga--estimated that
the number of computer jobs moving overseas will grow from 27,171 in
2000 to a cumulative total of 472,632 by 2015. Forrester researchers
predict that other services--including call center services and
back-office accounting--will follow IT operations' move abroad.

Giga's report may be good news for company leaders looking to cut
costs, but it's ominous for U.S. IT workers. Moore anticipates Global
1,000 companies will continue to replace local contractors with
offshore or near-shore IT workers. She also indicated companies using a
U.S. outsourcing firm will push the provider to shift work overseas to
trim expenses.

Critics of shifting IT work overseas have raised questions about the
skill levels of foreign programmers and the effect on U.S. workers. A
technology worker advocacy group, WashTech has called for a
congressional study of the trend. Shifting high-tech jobs offshore also
has prompted questions about the long-term technological leadership of
the United States. Proponents argue that the U.S. work force will be
spurred to develop more cutting-edge skills and that high-end work will
remain in the country.

In late January, Gartner said its survey of 36 outsourcing companies
showed that offshore application management was ranked as the
highest-growth service opportunity in 2003. Application management
means overseeing business software, such as SAP or Oracle systems, and
includes tasks such as fixing bugs and installing upgrades.

The second-highest ranking growth opportunity for IT outsourcing was
"near shore" application management, Gartner said. Near-shore refers to
operations located in countries such as Canada or Latin America.
Besides using offshore facilities for application management, companies
are adopting an overseas strategy for business process
outsourcing--which involves organizations turning over tasks such as
billing and call center operations--and IT infrastructure management,
Gartner said.

Hewlett-Packard, IBM and Electronic Data Systems all trumpet their
ability to serve customers from facilities in low-wage countries such
as India, Mexico and Brazil. That strategy is partly in response to the
success of Indian-based players such as Infosys Technologies and Wipro
Technologies. Indian companies began to take on low-profile tasks like
legacy software maintenance in the early 1990s. But they've since
graduated to offer more mission-critical services. Some Indian IT
companies also offer business process outsourcing services.

Giga's Moore estimated India's business process outsourcing will grow
by at least 65 percent this year. The country's sales from business
process outsourcing--also known as IT-enabled services--were $1.5
billion in 2001, she said.

Moore also said Mexico in particular is an attractive near-shore option
for North American companies thanks partly to its low cost, government
investment in the software industry, and the North American Free Trade
Agreement. Moore suggested IBM Global Services and Mexican company
Softtek could be viable outsourcing partners.

Moore expects U.S.-based IT companies to increase their offshore
resources because of the growing acceptance of the value of overseas
outsourcing. But, she said, BearingPoint's investment in a China
office, for example, will not pay off for U.S. or European customers.
"Clearly BearingPoint can service its clients in Japan and Korea from
China. However, BearingPoint mistakenly expects its Chinese facility to
support mostly North American clients," she said.

Tom Gary, a managing director at BearingPoint, disagreed with Moore's
assessment. Questions about language and intellectual property in China
"were all ones we raised five years ago about India," he said. China
will prove to be a sound place to do business, he added. BearingPoint,
formerly KPMG Consulting, has a small number of software developers now
working out of China but is investing in a new software development
facility in Shanghai set to open in April.

Moore expects Indian providers to offer higher-level IT services such
as architecture, design, development and technology strategy services.
She also predicts Indian IT companies will expand into other low-cost
countries such as China and Eastern Europe, and even acquire top-tier
IT services companies such as BearingPoint. A BearingPoint
representative declined to comment on that possibility.

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