American companies have enjoyed significant advantages outsourcing to companies located beyond their borders. "Offshore outsourcing" provides a powerful labor arbitrage; U.S. firms can receive made-in-the-U.S. quality at remarkably lower prices because of the wage scale differential in other lands. Labor savings can be as much as 60 percent. And, time zone differences mean someone is always on the job.
But this formula works only when the offshore partner operates in a secure political environment that remains friendly to America. The events of September 11 taught Americans there are some who do not cherish our way of doing business. Here's how the terrorist attacks have impacted offshore outsourcing.
The New Importance of Risk Management
Risk management has risen to the fore. Now, companies want to have multiple suppliers if they are using labor arbitrage. "If you have a development center in Kashmir working on code that's core to your business, you're going to be worried," says Rob Linder, CEO of Providio. Having more than one provider in different corners of the globe reduces the risk, he says.
Brian Phelps, president and CEO of Vested Development, Inc. (VDI), a Burlington Massachusetts offshore consultancy firm specializing in Russian offshore code development, agrees. Many of his prospects tell him they have been using suppliers in India. After doing a serious risk assessment since the attacks, they have decided "they want to diversify and have their work performed in more than one area of the world."
Phelps says VDI, which specializes in the vertical software market, has offshore partners who write what he calls "traditional shrinkware" for outsourcing suppliers, Application Service Providers (ASPs) and Web developers. However, after the attacks, Phelps says non-software clients have also approached VDI for outsourcing help in Russia.
The Providio executive says companies tell him they want to outsource to him and let him handle the offshore labor as part of their risk management strategy. "They tell me, 'You deal with the company in Bombay. We have to keep our company alive,'" he reports.
His buyers also point out they can easily take an American company to court if the relationship goes sour. Lawsuits become more difficult when the defendant is overseas.
Providio, a Boston, Massachusetts-based supplier, specializes in code writing, prototyping, testing and maintenance. Its buyers are corporate IT departments or systems integrators. It has formed partnerships with companies "all over the globe," says Rob Linder. All its back office programming is done overseas.
Outsourcing In India
Political stability is now a key question for offshore suppliers. Satish Ponnaiya, vice president, client services for Vision Health Source, which is based in Vienna, Virginia but does all its coding in Chennai, India, says "people are uncomfortable with what's happening in Asia. Now we're getting a lot of questions. People want to know what happens if India gets involved in a conflict. They want to be reassured nothing will go wrong with their business if they outsource to us."
Shalen Gupta is president and COO of Renodis, an offshore outsourcing strategic advisory firm based in Minneapolis with offices in India. He says companies must now factor in "the new risks that have been introduced since the terrorist attacks and thoroughly understand how to mitigate those risks." He points out that although India is politically aligned with the U.S. and has pointedly not harbored terrorists, "its close proximity to central Asia and its longstanding conflict with Pakistan over Kashmir make it susceptible to terrorist activity."
That said, he feels the "probability of a large scale terrorist attack in India is relatively low." Ponnaiya, who is also based in India, says his response is, "You're more at risk of an earthquake in San Francisco or a hurricane in Miami than you are of political unrest in India." He shows worried buyers a map of his country, pointing out Chennai is located far south, away from the volatile borders. Then he adds, "We have insurance!"
U.S. buyers "want to outsource because of its many advantages but they want reassurance," he says. "They want to see in writing the repercussions if something happens in India," he continues.
The U.S. economy was in a free fall before the attacks and has gotten worse since. That has made it hard to ignore India's enticing labor arbitrage argument. Ponnaiya says fully loaded labor costs including technology are "up to 60 percent cheaper than in the U.S." Half of his employees have post graduate degrees. And they are native English speakers.
This economic situation has boosted the company's client roster. Before September 11, Vision HealthSource, which does offshore data entry services for medical billing companies in the U.S., had five clients. Today it has nine.
"Offshore outsourcing to India is just as viable today as it was prior to September 11," say Gupta.
The attacks have, however, had some deleterious effects on outsourcing partners in India, Gupta continues. He says there are problems with international travel "especially to countries with large Muslim populations like India." Also, the U.S. Immigration department has tightened up entry restrictions, which has delayed visas and "increased denials." This has hurt "body shops" in the U.S. staffed by Indians.
Outsourcing in the Philippines
Dr. John D. Butterworth, CEO, U.S. operations, for America Data Exchange Corp. in Redondo Beach, California, says he has seen "50 percent more interest in the Philippines" since the attacks because of its "stable government that's friendly to the U.S." The company, which has been outsourcing in the Philippines since 1988, specializes in back office accounting, medical billing and insurance claims.
Butterworth reports the company is involved in a host of new presentations to prospective buyers. "We are answering questions on security, reliability and confidentiality," he says. People are especially wary of sending their data overseas. American Data Exchange keeps all its servers in the U.S. Its Filipino staff can only access these servers via their Web browsers.
Outsourcing in Russia
Phelps says his business shut down for the remainder of September. But in early October new buyers approached him because of his association with the emerging outsourcing business in Russia.
During the height of the Cold War, the U.S. put just 8 percent of its Gross Domestic Product into its military-industrial complex. But Russia spent 30 percent of its GDP to support an educational system that churned out technical experts, notes the CEO. "Today Russia still churns out a hugely disproportionate number of engineers, mathematicians and scientists," Phelps reports.
That highly educated populace is underemployed currently now that government expenditures have been cut dramatically. American outsourcing suppliers are turning to them to develop commercial software. "If you already have a PhD in engineering, it's not that big a leap," says Phelps with a laugh.
Which is why labor arbitrage is a guaranteed benefit of outsourcing even in these uncertain times.
Lessons from the Outsourcing Journal:
- Companies outsourcing to offshore providers are now diversifying so their code development is handled in many countries.
- American buyers are asking more questions and want reassurance in writing from offshore partners.
- Interest in Russia and the Philippines as alternate locations is growing.
- Labor arbitrage in India can save as much as 60 percent of U.S. labor costs.