The biggest surprise: Poland has been the fastest growing offshore location for IT outsourcing even though India has been the single largest recipient of IT job imports, according to a new study from Frost & Sullivan.
For the three years from 2002 through 2004, Poland had a compound annual growth rate (CAGR) of 40.11 percent for outsourced IT workers in captive companies, where the employers still own the employees. The CAGR for outsourcing service providers in Poland was 58.72 percent during that period. In India, the CAGR was 11.36 percent for captives and 12.32 percent for jobs sent to India where an Indian company owns the employees.
And how many jobs really went offshore? During this 36-month period, the high-cost nations sent 826,540 IT jobs to developing countries, creating an install base of 7,599,540 IT jobs in the developing countries examined by the study. IT job exports increased by a CAGR of 5.93 percent. The high-cost nations included France, Germany, Hong Kong, Japan, the UK, and the US.
The value of all IT jobs sent abroad totaled $464.04 billion, according to the Frost & Sullivan report. The US and Japan accounted for 70.2 percent of these jobs, according to the study.
“We did the study because we wanted to better understand why high-cost regions of the world export IT jobs abroad,” says Jarad Carleton, IT Industry Analyst for Frost & Sullivan and the author of the November 2004 study, entitled “Global Offshore Outsourcing and Offshoring of IT Jobs.” The firm sought to suss out the trends, challenges, drivers, and restraints of exporting IT jobs from high-cost to lower-cost regions around the globe. Then, it determined where those IT jobs went.
Some IT Jobs Should Stay Home
The study also categorically states, “Not all IT jobs should be sent abroad.” The Frost & Sullivan analyst says buyers have to ask: Can the outsourcer provide your organization with the level of service needed in the time frame required? “Companies sometimes overlook that question?which must go hand-in-hand with the question of cost–when deciding to outsource IT jobs,” Carleton says. Even if an offshore provider undercuts the competition in price, buyers eventually end up paying more while the outsourcer takes months to ramp up.
Then there’s the issue of risk. Carleton suggests each offshoring prospect quantify its unique risks “to determine how much money the executive committee is willing to lose if things go wrong.”
Buyers Are Looking Beyond India for Niche Services
A closer look found a lot of nuances behind the Indian monolith. “Companies are looking for special niches that India doesn’t have,” says Carleton. For example, the Japanese want to offshore their IT jobs to a locale where the workers speak their language and do business the same way. Brazil is an attractive option for them because there has been a significant level of Japanese immigration to Brazil, according to the analyst.
The Russians have built a reputation as IT problem solvers (as opposed to programmers with quality-control expertise.) The report found 42.7 percent of the IT outsourcing jobs going to Russia came from Japan.
The French are adamant that their outsourcers speak French. The report found France is sending its white collar IT jobs to Tunisia and Mauritius.
Some companies don’t mind paying a premium to offshore their work closer to home. For example, the Germans are sending jobs to Poland and Romania. “The further away you send the jobs, the harder they are to manage,” reports the analyst. Time zones are a negative when the outsourcing buyers call a face-to-face meeting or have to set up telephone conversations.
Carleton says Poland has many attractions for IT offshoring buyers. It has a highly educated workforce. After the fall of the Iron Curtain, the government moved quickly to create a market economy, which attracted outside investment. The analyst says Poland was able to provide low-cost IT services even after it joined the European Union.
In addition, the Polish government has made financial grants available to all industries, including IT, through May 2002’s Act on Investment Incentives. These incentives include grants up to 25 percent of a company’s outlay; Carleton says 15-20 percent is the average. Typically an employer receives a grant of up to 4,000 Euros per job created. In addition, there are training grants of 1,150 Euros per employee. This allows a buyer to hire a skilled employee who needs to learn an additional skill for the outsourced job. Finally, there are infrastructure grants, which can help underwrite fiber cabling or data centers.
The report found satisfaction levels in the global sourcing of IT labor was “unexpectedly high.” With 5 being the top level, respondents rated their offshore labor in the 3-4 range. Language problems, and cultural differences and misunderstandings were the main issues preventing offshore IT works from earning a 5.
IP, Regulatory Issues Buyers Must Think About
Carleton says buyers of offshore services have to think through several issues to create a favorable result. “There’s more to consider than just cost,” he says. These include:
- Does the low-cost country respect intellectual property laws?
“In the past, India has not respected them,” says Carleton. When a dispute arose, the Indians said, “Too bad.” This is a potential problem because of the “sensitive issue of technology transfer, where your organization shows a lower-cost and technologically-adept organization your business processes and technology.” Carleton warns companies should be careful because “you could be creating a competitor for yourself.”
The analyst adds this attitude has begun to show signs of change as a condition of admitting India to the World Trade Organization. But what about the other offshore locales?
- Does the low-cost country have an efficient and transparent court system?
Unfortunately, Carleton says few low-cost countries on the Frost & Sullivan list can answer “yes” to this question. He says companies must make sure local courts will “adjudicate the case before you lose market share.”
- What measures does the country have to prevent intellectual property (IP) theft?
If the US company is a healthcare provider, it could be criminally liable for a leak from the offshore company, Carleton points out, because of HIPAA (Health Insurance Portability and Accountability Act). Financial institutions face similar challenges thanks to the Sarbanes-Oxley and Gramm-Leach-Bliley Acts. “These industries need to be extremely careful about what they choose to offshore if they don’t want to pay fines or serve jail time,” he says.
In addition, there are also very strict privacy regulations in EU countries.
If your offshore outsourcer violates the laws of your home company, your company will be liable, not the offshore outsourcer, Carleton points out.
Challenges to Offshoring
The report listed offshoring challenges, which it defined as “temporary hurdles to a good business opportunity that a diligent management team can navigate and manage.” A major challenge is “coping with the inevitable customer and government backlash to offshoring and offshore outsourcing,” says the report. Frost & Sullivan recommends balancing shareholder value with the company’s public perception.
The Need to Prevent Legislative Limits on Offshoring
Another major finding was that governments can not legislate limits on offshoring. “It’s impossible because offshoring is occurring in almost all developed countries,” says Carleton. Any country that legislates limits on sending white collar IT jobs elsewhere places “domestic industries at a competitive disadvantage,” in his opinion. Concludes the report, “The nation that places restrictions on the export of IT jobs will hobble its own business and could be inadvertently legislating the destruction of millions of additional jobs as a result.”
How the study was done: Frost & Sullivan collected is quantitative data from a three-year period from 2002-2004. It collected 600 questionnaires from the US (118), UK (118), France (100), Japan (70) and Hong Kong (94). The qualitative data came from 56 interviews in 14 countries. Frost & Sullivan screened all respondents to ensure they were decision-makers in IT-related decisions. Firms covered in the report ranged in size from under 50 employees to global companies with over 100,000 employees working in several countries. Frost & Sullivan also interviewed government officials in each of the 14 countries it surveyed.