Workers and some tech bosses are fearful. Others see an upside to the pain.

By JENNIFER LIEN

THE heartland of the world's infotech revolution is feeling the raw edge of outsourcing, the new corporate trend that is reshaping businesses around the world.

Here in Silicon Valley in California as the slump wears on, outsourcing is fast becoming a dirty word among tech company workers fearful over their job security.

Companies desperate to keep costs down have begun to send more and more jobs abroad. Fearful that many of the jobs cut during this downturn will not come back, white-collar tech workers increasingly are speaking up against this outsourcing trend. Some have organised pickets.

Adding to the anxiety are reports that major enterprise software house Oracle Corp would cut some R&D jobs in the US and move them to India, where the company is doubling its workforce from 2,000 to 4,000 in the next two years.

Oracle chief Larry Ellison recently pronounced Silicon Valley to be a mature economy - which, if true, would mean diminished prospects for job creation in the Valley.

Workers on the receiving end are not the only ones worried. Intel co-founder Andy Grove, whose company's chips run on some 90 per cent of the world's PCs, warned earlier this month that the US software industry was being weakened by outsourcing to countries including India and China. Not all tech bosses, however, see it that way.

And the Valley is not alone in feeling the business and job market changes being wrought by outsourcing. Other industries in the US are seeing higher-value-added jobs being moved overseas. These include financial analysis and market research. Many Fortune 500 companies, including banks, have been using software engineers in India to work on their global computer systems. Little wonder that global outsourcing is estimated to have grown from US$2 trillion in 1998 to US$5 trillion in 2003.

In the tech industry, jobs such as telephone call centres and help desk assistance have long been farmed out, often to India. So have low-end software programming jobs. And now, even quality-assurance jobs and some software engineering jobs are beginning to move, says Chinese-American businessman Hong Chen.

The next wave of jobs, says Dr Chen, founder of Internet roaming service giant GRIC and also a Valley financier, will involve higher-end core software engineering.

His company has had a software development centre in India for the last two years. 'We feel good about it, and most of our new engineering hiring is now done in India,' he told BT.

Companies are outsourcing jobs not just because it's cheaper to hire workers overseas. The tech slump and the increased restrictions on immigration since Sept 11, 2001 have forced US-trained tech workers from other countries to leave in large numbers. In the meantime, fewer young Americans, many schooled in mediocre local school systems, are showing an interest in the sciences.

Stanford University president John Hennessy told the San Francisco Chronicle the other week: 'It's now attractive to go back to India, Taiwan, Korea or mainland China after you do your graduate work in the US. When I first came to Stanford, nobody went back. That's a real change, and it's going to affect our ability to have the talent we need to make this country successful.'

Companies looking to outsource jobs - including Microsoft and Intel - have even organised job fairs in Silicon Valley for foreign-born, US-trained tech workers willing to go back to their homelands. India's rediff.com estimates that 10 per cent of Oracle's India employees were formerly based in the US.

'The real question is not whether jobs are leaving the Valley, but whether there are higher-paying jobs being developed to replace the ones that have left,' says management consultant George Koo, who specialises in US-China business relationships.

'Now, with the post-9/11 scare, we actually have a policy that actively discourages foreign students from entering the US. And, unfortunately, our school systems are, frankly, horrible - and deteriorating.'

If the Valley is able to retain strong tech talent, it may not lose out in the long term, Mr Koo believes. 'If Silicon Valley is competing for jobs that went offshore, it no longer is the centre for high-tech development and innovation. One can argue that by sourcing lower-valued-jobs offshore, creative energy is freed up to innovate, to begin the next high-tech revolution.'

This is a view echoed by Dr Chen. If outsourced jobs succeed in making Valley companies financially healthier, these companies could 'become more competitive and create either better earnings, or more competitive products', he says.

Also, shipping lower-end software jobs overseas leaves US-based 'power programmers' with more R&D dollars to create new technology and products, George Gilbert from San Francisco's Tech Strategy Group told the weekly Silicon Valley Business Ink recently.

And these power programmers - who are intimately involved in the marketing and delivery of these new technologies - are less likely to have their jobs farmed out than their lower-skilled colleagues, says software company owner Steven Schoch.

Indeed, market research firm Evalueserve released a report earlier this month arguing that outsourcing actually boosts growth in the US. Commissioned by an Indian IT industry group, the report says US$130 to US$145 is re-invested into the US for every US$100 worth of work shipped abroad.

Or, in Mr Koo's words: 'The more regions that are involved in high-tech development, the higher is the tide that will float all boats.'

In the meantime, Silicon Valley would do well to examine itself critically and maintain the ingredients needed to stay ahead of the innovation curve, says Dr Chen.

One option could be to encourage companies to keep, or set up, their international headquarters in the Valley. 'After all, Silicon Valley has the reputation, the best weather I have ever seen, and the proximity to Asia. Many successful Chinese CEOs are buying multi-million-dollar houses in the Valley. Their kids come here for their education,' he says.

TheBusinessTimes

E5 Systems, Inc., a US-based application outsourcing company with wholly-owned software manufacturing centers in the United States, China and India, announced today, that on Tuesday, November 4th, it is hosting an intimate roundtable for CIOs, IT executives and other industry leaders to discuss research trends and best practices around application management and offshore outsourcing.

The research, entitled "CIO Application Management and Outsourcing Report," was conducted with the goal of helping companies understand the processes of categorizing and managing its application portfolio to make strategic decisions on the right types of applications to be outsourced offshore, insourced, consolidated or retired, onshore and offshore teams, places to outsource to, and the associated cost and value. The report outlines best practices that will aid businesses to optimize their current systems and reallocate resources to better serve the systems that support their core business.

Leading the discussion will be Gordon Brooks, President and CEO of E5 Systems, who explained that "businesses are more and more often tasked with doing three things at once - continuing to develop new, strategic applications while maintaining their current applications and cutting costs on top of it. Our research helps to shed some light on what CIOs and IT executives are facing, and the steps many have taken to alleviate these challenges."

For the past eight months, E5 Systems has conducted surveys and met with more than 50 CIOs about issues surrounding application management and outsourcing. The types of industries represented include financial, healthcare, retail, publishing, entertainment, computer and manufacturing, among others. Based on annual revenues, participating companies range from Global 2000 to Fortune 10 businesses. The participants' annual IT budget median is approximately $150 million.

"IT executives are constantly tasked with investing in strategic initiatives while identifying ways to cut costs," added John McGregor, CIO of Sweetheart Cup, who will speak at the event, sharing his experiences and perspectives on these issues. "By identifying which applications are vital to an organization and need to remain in-house, and which should be outsourced, IT executives can effectively manage their portfolio and reallocate resources to more strategic business needs."

Event Information

The event will be taking place at the Tower Club in Vienna, VA, on Tuesday, November 4th from 5:00 - 8:00 p.m., with a cocktail reception to follow. All attendees will receive a complimentary Application Management Outsourcing Report that highlights key findings from the research, as well as best practices, offshore strategies and future application management trends. If you are interested in attending the event, contact Joanna Bolles at jbolles@e5systems.com.

Findings

Some key sample findings of the research include:

• Flexibility/agility was the number one CIO requirement for sustaining a long-term application management relationship.
• 67% of respondents could not define application management spending areas compared to the overall annual IT budget. In most cases, percentages were provided for existing systems versus hard dollar amounts for new application development.
• 48% are seeking sustainable lower cost alternative sourcing countries.
• 85% say that they will source application management offshore within the next five years.
  All CIOs have either outsourced applications (mainly new development) in the past or are considering outsourcing.
• 72% of respondents believe that application management should be integrated during the strategy phase; however, only 22% of respondents actually have acted on this belief-and those who did have only done so on certain application development.
• 63% of companies primarily outsource in India but are seeking alternative sourcing countries.
• Respondents reported the lowest scores on pure offshore firms' communication skills, business skills and project management capabilities.

About E5 Systems

E5 Systems is a US-based application outsourcing company focused on strategically aligning the who, what and where of application management to meet customers' business needs. With wholly-owned software manufacturing centers in the United States, China and India, E5 Systems helps companies maximize the value and mitigate the risks of global application outsourcing. For more information, please visit us on the World Wide Web at E5 Systems, Inc. or contact us at 781-768-5556.

PR Newswire

By Patrick Thibodeau

LOS ANGELES -- (COMPUTERWORLD) Offshore outsourcing is so mainstream that by next year, more than 80% of U.S. companies will have had high-level discussions about the topic. And 40% will have completed some kind of pilot program or will be using near-shore or offshore services.

Despite that assessment, made by Gartner Inc. at an outsourcing conference here last week, offshore outsourcing remains a difficult issue for executives to talk about. In fact, many attendees were skittish about responding to questions for this article, except in the most general terms.

Corporate officials did, however, acknowledge trends related to the politically charged issue. For instance, BP PLC in London is discussing offshore work with its existing outsourcers, IBM and Accenture Ltd. "They are offering us an opportunity to have consistent performance at a lower cost," said Russell Taruscio, downstream chief financial officer at the oil company. Adding offshore components to outsourcing contracts is on the rise, according to IDC. In a report last week, the Framingham, Mass., research firm said offshore outsourcing is the dominant trend in the IT services industry, with 42% of the application management contracts now having some offshore component. A big reason is cost.

Bob Walters, IT director at supply chain system provider Intermec Technologies Corp. in Everett, Wash., surveyed development costs recently at an SAP AG user conference. He determined that U.S. companies are charging $80 to $120 per hour for programming work, while the fee for offshore providers is about $40.

When you can pay a third of the price, offshore is "something that has to be considered," said Walters.

As offshore business grows, so does competition for it. Pioneering India-based offshore companies, such as Tata Sons Ltd., are facing increasing competition from the large U.S. IT consulting firms. Accenture CEO Joe W. Forehand, who spoke at the Gartner conference, compared the trend to the previous exodus from the U.S. of many manufacturing operations. "The way we look at it, the industrialization of IT is a reality, and we have to embrace that," he said.

Competition is also becoming more global. In the vendor exhibit hall, Bamboo Networks Ltd.'s mere presence raised eyebrows. Some rivals said it was the first China-based outsourcer to set up a booth at a U.S. outsourcing conference.

China is considered something of a sleeping giant in the offshore world that isn't quite ready to compete with India. China "represents the next wave" in offshore outsourcing, said Traci Gere, an IDC analyst. Rajesh Rao, chief operating officer at Hong Kong-based Bamboo, which operates an offshore development center in Guangzhou, China, said the company believes it has developed its offshore processes sufficiently to compete for U.S. customers.

One user of offshore services, Sudhir Agarwal, senior manager of architecture and services at Verizon Communications in New York, said India's talent pool, its populace's proficiency with English and the country's U.S. connections will ensure India a dominant role for years to come. But China's emergence "is good for companies in the U.S.," Agarwal added.

Former CTOs describe their journey to the top executive position

By Jack McCarthy

Chief technologists are gaining strategic influence in the enterprise as they are increasingly asked to help produce revenue for their company in tough economic times. As a result, these IT leaders are seeing opportunities to move up and achieve CEO-status — outside the now familiar CTO-founder path, industry experts say.

Those who have already made the leap to the top say there is no clear path for reaching a CEO-level position. But one who has made the change, Mike Wilens, president of West Group, the Eagan, Minn.-based legal publishing giant, says ambitious technologists should focus on two tactics. "I tell people interested in management to try to get varied experience early in your career and get close to revenue," he says.

By moving beyond the IT shop and into the corridors of the enterprise with the finance, sales, and marketing teams, chief technologists will gain invaluable insight into what it takes to achieve the CEO position, adds Dan Woods, a consultant at Evolved Media Networks of New York, an IT industry author, and a former CTO.

"Successful CTOs find a way to beat back their fascination with technology and pay attention to the business issues," Woods says. "Companies will recognize it and reward it."

Experience tells

Enterprises are increasingly looking to CTOs for leadership as technology soars in strategic importance, and CTOs can leverage this by expanding their horizons within the company, says Mark Minevich, an IT consultant and writer in New York . "The CTO has to take a leadership role in the company," he says. "In the past, the CTO was the enabler of the technology applications. In the future he will be the technology thought broker in the enterprise, helping to figure out how to commercialize and monetize technology."

But to operate in a corporate climate, technologists should know how their company works. Wilens says enterprise boards of directors will need to see that CTOs have acquired business skills before expanding their role.

As a young graduate of the University of Michigan , Wilens says he gained invaluable experience on day-to-day business needs as an entrepreneur with small startups. "I was half CTO and half salesman," he says. "Making payroll really focuses your mind. CTOs in small businesses are forced to wear many hats, and that can be a tremendous educational experience."

Wilens, who has held the CEO role since 2000, joined West Group as a CTO in 1997, after serving as CTO for Lawyers Cooperative Publishing and then as CEO of Legion Ltd., a London-based provider of services for the telephone company market.

Once at West Group, Wilens leveraged his experience to develop the company’s online strategy, which includes its popular Westlaw online legal research service, with more than 15,000 databases. "I got involved in putting us on the Web, which drove our product," he says. "You can see how I moved close to revenue."

Business experience also was essential to the success of John Hansen, appointed recently as CTO of the Colorado governor's Office of Innovation and Technology in Denver . After a transition period, he is slated to become secretary of technology. Hansen says that although he was most recently CEO of the Colorado Institute of Technology and before that CEO of Boulder, Colo.-based Solant, his early years with startups were invaluable experience.

According to Hansen, his experience at network product developer Networks Northwest in 1990, which ultimately failed, was one of his most valuable lessons. He belatedly recognized he had little understanding of the dynamics of collaborating with sales, marketing, and finance divisions. "I don’t know where that is taught, but it was a lesson that cost thousands of dollars for me to learn, he says."

A chief technologist's education

Still, there are no rules that say chief technologists must fail in the business world to get experience. As the strategic importance of CTOs gains further recognition, educational venues are in place to help in a transition.

"I see people in our organization, which includes 2,000 technologists, who might be candidates for executive management courses," Wilens says. "It gives one the opportunity to move beyond your business area. We are trying hard to identify people who have management capability. You want somebody — to use a technical word for it — who has a clue. You’ll know them when you see them."

Hansen also emphasizes business education. "I feel passionately about this," he says. "CTOs have to understand completely the business principles. They need to find the skills to do cost benefit analysis. They have to have the knowledge to go before the board of directors.

"You’ll see more CTOs with technology degrees combined with business education," Hansen says. "There are executive business courses offered now at the top business schools, such as Harvard (University), Stanford (University), the Wharton School of Business, (the University of California at) Berkeley, and Duke (University)."

Hansen failed when he first had to deal with sales and marketing units in his first CEO position at Networks Northwest because he had an engineer's mentality.

"In my first company, my biggest problem was not understanding that sales, marketing, and finance people had different motivations than I could imagine," Hansen remembers. "I was using my leadership skills like I did successfully with engineering," except the sales and marketing staff were not responding, he says.

Hansen took business as well as communications courses to relate better. He learned that engineers wanted "just the facts" to be able to carry out their mission, while sales and marketing staff liked supportive speeches.

After talking to vice presidents of sales and marketing divisions of his next startup Metapath, Hansen says he worked out ways to lead the entire company. "I discovered what were the motivating drivers for different people; what were their incentives and disincentives, and how you get them to change behavior," he says. "By the way, that is not taught in any business school."

Culture club

In the end, CTOs must expand their culture from an exclusively technology-based approach to one embracing the entire company, the chief technologists themselves say.

"There's no substitute for a for market-facing experience," says Laurence Bunin, CEO of Handshake Dynamics, a New York-based IT management consulting company. "When technology executives reach the highest ranks, they can’t do it without having had their feet on the ground in a sales and marketing role," he says. "So, very much like management training programs, the companies send these executives to spend some time in these areas."

Chris Lofgren, the former CIO and now president and CEO of Greenbay, Wisc.-based Schneider National, the truckload carrier with $2.4 billion in revenue in 2001 and some 14,000 trucks and 40,000 trailers, says his willingness to learn from other divisions and adapt to their business needs was the secret of his success.

Lofgren says he came to Schneider as an engineer specializing in supply-chain distribution, then served as CIO, COO, and in 2002, CEO. "The great thing about the CIO role was I got to visualize the whole area of the company," he says. "When you start to see how the company thinks about technology strategically, you get visibility into customers, business processes, and services. In our company, it was an opportunity to move into an operating role.

"You’ve got to adopt the perspective that technology is merely the enabler of the business," Lofgren adds. "The ability to have an impact on the business helped me. … To me, the sales, marketing, and finance people all make the business run," he says. "You find you can learn from all of them."

InfoWorld

By Loretta W. Prencipe

THE CHIEF TECHNOLOGIST'S role of aligning technology with business means that the CTO must be one-part strategist and one-part task master. If the CTO were to manage day-to-day IT operations without having a hand in development of corporate strategy, the enterprise would be left with a technology patchwork that serves not the corporate goals, but rather the corporate technology.

Chief technologists intuitively understand how IT must be included in developing long- and near-term strategic goals. But the questions become, How does -- and can -- strategic planning go from vision statement to action plan and where does budget planning fit in?

The tail wags the dog

Strategic and budget planning definitely play together, says Mary Stassie, senior vice president and CTO at Herndon, Va.-based government systems integrator DigitalNet. "I look at strategic planning as what direction you want to steer the ship. Budget planning is more tactical."

Strategic planning leads budget planning, says Joe Amor, vice president and general manager of Microspace Communications in Raleigh, N.C. "I see budget and operations planning as planning that occurs as a result of a finalized strategic plan. The strategic plan defines how much money -- budgetary -- and what infrastructure -- operations -- will be required to execute the plan."

Amor, who oversees operations and how technology supports and furthers enterprise operations, says his role in strategic planning is to "determine current trends and anticipate future market demand so Microspace will have the right service at the right time with the right features -- and all of this at the right price."

A CTO, says Mike Gioja, vice president of technology at Framingham, Mass.-based Workscape, "must really understand the business drivers and be able to articulate in business terms how new technologies could provide the company with a competitive advantage."

This must be in the context of fully understanding the industry landscape and reality of current business and sales issues. "Everything is a trade-off, and this requires balancing the short term and long term," says Gioja. "The CTO needs to consider design points for longer term needs in order to minimize rework/rewrites that could negatively impact the business model and ROI."

In a supporting role

Even as CTOs develop the technology road map to be folded into the enterprise's strategic plan, they cannot do so in a vacuum.

Amor says his company's executives believe that market research is never-ending requirement. "[Market research] must be a standard component of weekly/monthly job responsibilities -- and not just something that one does at the end of the year in anticipation of the upcoming year's plan."

Amor looks to both current clients and his company's account managers as extremely valuable sources of information required to put a strategic plan in place. "After all, both are vital participants in the market and are exposed to a variety of business-critical information on a daily basis," he says.

Stassie agrees and also includes field managers as important sources in developing a strategic plan.

Defining the cloud

Taking a vision -- a strategy from concept to actionable plan -- is more of that managing amid the chaos, something CTOs are familiar with. Still, strategic planning without resulting action items is little more than lip service.

DigitalNet's Stassie says her company develops a strategic plan document yearly, something that comes from meetings of executives and various managers. "Everyone walks from the summit, with action items -- with items that are tracked," she says.

Other companies are quite formal in their approach to strategic planning. Mark Minevich, now CTO of Marksoft Holdings, served as CTO of Next Generation in IBM's Global Incubator program. His division worked with a corporate strategy team a few times a year to focus on emerging business opportunities, conducting high-level strategic planning in the areas of strategic vision, offerings, core competencies, market intelligence, and value propositions. The team "performed a comprehensive market intelligence and market management study, validated by third-party providers and historical data points before the acceptance of the strategic plan," he says.

CTOs in complex organizations must obtain "support for a strategic plan from other CTOs and strategic planners in other divisions as well as an alignment with corporate strategy," says Minevich, who also is chairman of the New York-New Jersey chapter of the Technology Leadership Council.

But any resulting plan cannot be made of stone, says Stassie. "Technology is changing so quickly that long-term strategic plans are now two to three-year plans. The plan can't be a plan for plan's sake. It must be a living document."

InfoWorld

By Beth Ellyn Rosenthal, Editor

Financial institutions worldwide are increasingly interested in sending IT work to lower cost countries. That was the key finding of a new Deloitte Research study, which surveyed 27 global financial institutions including 11 of the top 20, based on their market capitalization, in the U.S., U.K, the Netherlands, Germany, Switzerland and Japan.

"We are on the cusp of a revolution," reports Chris Gentle, global director of financial services research for Deloitte Research. The London, England-based analyst says 33 percent of the respondents told Deloitte they already have sent IT work offshore and 75 percent said they will have work offshore within the next 24 months.

Gentle says intense cost pressures, lower share prices of these publicly traded companies and the general economic downturn are the major reasons historically staid financial institutions are looking for a new solution. "The financial services industry is becoming increasingly mature. Banks have to reduce their costs to compete in the future," the analyst explains.

How much are the financial institutions saving? The average was 39 percent, Gentle says, although some participants reported savings over 50 percent.

IT Leads, But BPO Follows

While the survey respondents said they were immediately working on sending IT work offshore, many said moving business processes offshore was just over the horizon. BPO processes migrating to India include call centers, general processing for human resources, finance and accounting, and back office, and transactions like life insurance.

Gentle says this offshore revolution "separates the delivery of financial services from their processing for the first time."

The banks that are currently sending work offshore are predominantly using outsourcing as their business model, Gentle notes. In the future, Gentle predicts a hybrid model will emerge. He thinks the banks will create joint ventures with their outsourcing partners. For example, a bank may own the facility and hire the people. The outsourcing service provider runs the operation and owns 55 percent of the venture. "In this model, the banks have more control over the process. They can ensure the offshore systems and processes comply with their business models." This is important for tax and liability considerations, Gentle explains.

Where's the Work Going?

Where are the banks sending their work? India. "India has become the back office of the world," he says. However, the financial institutions "don't want everything in one place," he reports. To diversify, the banks are creating more than one outsourcing relationship. Secondary work is going to Sri Lanka, China, South Africa, the Philippines, Singapore and Malaysia. Gentle says banks are using these dual relationships to create labor arbitrage between the offshore service providers to produce the best cost savings.

This revolution also applies to Wall Street and the City of London. Trades completed on the New York Stock Exchange may be processed in Bombay or Bangalore. "Today these organizations have to adopt a new business model. Now they must operate in a truly multinational environment. They have to be comfortable dealing with Manila and Bombay," Gentle observes.

He adds that financial institutions that send work offshore gain no competitive advantage by doing so. "But they're at a big competitive disadvantage if they don't," he says.

Citigroup, for example, grew its revenues $35 billion over the last five years but only experienced costs increases of $12 billion during that period, thanks to offshore outsourcing, according to the Deloitte researcher. "Numbers like that make a huge difference in the industry," Gentle observes.

What does this mean for bank customers? Gentle predicts offshore outsourcing will "keep costs down for end-users." This is a good thing for all bank customers.

However, this trend also impacts current bank workers negatively. "There are HR implications. Offshore outsourcing is putting downward pressure on labor prices," the Deloitte executive reports. And U.S. workers are losing jobs. This may have political repercussions. The report says 15 percent of the global workforce--that's 2 million people--will see their jobs move offshore.

The tectonic plates are shifting in the financial services industry. Bank on it!

Lessons from the Outsourcing Journal:

• Competitive pressures are encouraging financial institutions to send work offshore.
• A Deloitte study found one-third of the globe's major financial institutions are already utilizing offshore outsourcing with 75 percent reporting they will be doing so in the next 24 months.
• IT processes are going offshore first. But BPO processes will soon follow.
• India is currently the back office of the world. But banks don't want all their processes in one location and are sending work to secondary locations, too.

Respondents said cost savings averaged 39 percent. But some enjoyed savings over 50 percent.
Copyright © 2003 - Everest Partners, L.P.

By Dinesh C. Sharma
Special to CNET News.com

Labor shortages and immigration curbs are making offshore outsourcing even more important to maintaining growth in the U.S. economy, according to a report market research firm Evalueserve released this week.

The firm said outsourcing to offshore locations could increase the competitiveness of American companies due to lower costs, increased flexibility and access to trained workers. And if local economies grow, it could mean new markets for the goods and services of U.S. businesses. For every $100 worth of work shipped offshore, $130 to $145 will be reinvested in the U.S. economy, according to Evalueserve.

The National Association of Software and Services Companies, an Indian information technology industry body, commissioned the report to try to allay fears over the adverse impact of outsourcing on the U.S. economy.

"Offshoring keeps U.S. businesses competitive, creates new markets for U.S. goods and services, and fills the shortfall in services labor that the U.S. is expected to face in the next seven years," Marc Vollenweider, CEO of Bermuda-based Evalueserve, said in a statement.

Not everyone is so sanguine, however. IT workers have complained that while the trend may help the overall economy, it is already depriving IT workers of jobs in the United States. Recently, about 50 people protested an outsourcing event in San Francisco.

Losing jobs isn't the only issue, opponents say. They also contend that the countries that receive the work often have less rigorous environmental and labor laws than the United States has. And moving tech jobs offshore could hurt the United States' technological power in the long run, some opponents claim.

But Evalueserve predicts that an aging U.S. population and slower population growth will lead to a shortfall in the domestic labor supply of 5.6 million jobs by 2010. Of these, immigrant workers will fill nearly 3.2 million jobs, and another 1.3 million jobs will be filled offshore, according to the report. That still leaves a gap of 1.1 million jobs.

In the worst case, the report said, offshore outsourcing will displace 1.3 million U.S. workers. But Evalueserve predicted that the loss will have limited impact on the U.S. labor market because of the practice of reallocation of jobs across industries.

By MARIA TROMBLY

Compared with some of the big-league outsourcing players, Russia is a rookie. The country's current revenue from IT outsourcing is $150 million to $200 million annually, a drop in the bucket compared with India's yearly draw of $6 billion. But, though little more than a decade old, Russia's outsourcing industry is learning to play to its strengths and is growing by 50% annually, analysts say.

Those strengths include low-cost and highly trained workers. The annual salary for a programmer runs about $5,000 to $9,000, which is comparable to salaries in India. The World Bank estimates that Russia has the third-highest number of scientists and engineers per capita in the world. But Russia's acceptance as an outsourcing destination has been lukewarm. The country is widely perceived as having an unstable economy and an inadequate technology infrastructure. Although in recent years, these issues have been addressed to a large degree, the Russian government itself continues to be an impediment to investment. "The biggest problem with the Russian government and its influence on the country's business culture is a lack of overall business transparency, a complex bureaucracy and restrictive tax, customs and immigration laws," says Stephen Lane, an analyst at Aberdeen Group Inc.

In addition, the government's financial investment in the IT sector is small compared with India's, which has a 10-year head start, and China's, where an authoritarian government makes investment decisions more easily than a nascent democracy like Russia. "But the government is beginning to recognize this need," says Lane. "They are beginning to recognize that they have a jewel here and need to do something to promote it."

In addition, the U.S. Department of Energy has been putting money into finding productive work for nuclear scientists who might otherwise be tempted to take jobs in North Korea. Also, a large number of Soviet emigres now working in the West have been sending work to colleagues in the old country. And finally, software development requires little more than brainpower, a computer and an Internet connection, all of which Russia has in abundance, particularly in its larger cities.

Vladimir Dubinin, who until recently was a vice president at Automated Trading Desk LLC, a New York-based trading technology company, turned to his homeland in 1999 when he needed to hire programmers to build prediction models. The team at Aljba Center in Moscow developed not only the theoretical estimates, but also the software needed to put them into practice, says Dubinin.

Although Russia may not be the best place to find large teams of experienced developers, it's an excellent location for scientific talent. "If you want to do a research project, you'd be better off with an Eastern European country, especially Russia," he says. "It does help a lot if you have at least one person who can communicate freely [in English]," Dubinin adds. "Especially when you need to communicate something fast."

But Russia?s bureaucracy continues to be a problem. "You spend many more hours doing accounting in Russia compared with the U.S.," he says. On the plus side, he adds, it's easy to hire additional personnel quickly. In general, the former Soviet Union has several strikes against it. Companies in the region tend to have short track records, not enough experienced management talent and a shortage of English speakers.

Craig Maccubbin, vice president of technology at LasVegas.com LLC, looked past these negatives when he decided to hire a company whose development team was based in Minsk, Belarus, a former Soviet republic. LasVegas.com, a joint venture of Mandalay Resort Group and Park Place Entertainment, both in Las Vegas, lets online visitors buy airplane tickets, rent cars, book hotel rooms and get tickets to shows. "There was a significant amount of custom, one-off development that needed to be done," he says.

Maccubbin looked at several options, including both U.S. and offshore resources, before picking Princeton, N.J.-based EPAM Systems Inc., along with companies in Ireland and the U.K. EPAM built LasVegas.com's content management systems, developed custom code to work with a third-party booking engine and maintains and updates the site.

"We've had fewer time-zone issues with Minsk, despite the additional two hours of difference" from Ireland and the U.K., he says. Not only was the Minsk team more willing to adjust its working hours, but communication was easier because of EPAM's project-tracking tools. Maccubbin estimates that hiring EPAM resulted in costs 20% to 30% less than in-house programmers and even greater savings over U.S.-based consultants.

Russia may be the biggest, but other Eastern European countries are poised for growth. Belarus and Ukraine, with large numbers of Russian-speaking programmers, offer a lower-cost alternative to Russia, says Gartner Inc. analyst Ian Marriott. Poland and the Czech Republic are seeing significant market growth because of their scientifically and technically educated workforces, says Marriott. Hungary has a more mature and slow-growing IT market but a greater availability of IT, management and entrepreneurial skills, he says.

Marriott estimates that the region could exceed $1 billion in outsourcing revenue by 2005, if economic problems and the mass emigration of knowledge workers are held at bay. But if companies like EPAM continue to grow, and if demand increases from the European Union, Russia's offshore development sector has a shot at the big leagues.

COMPUTERWORLD

Toos Daruvala
American Banker

McLEAN, Va. – Decades ago western companies began to manufacture physical goods in offshore locations such as Taiwan. Despite the cost of transporting the goods, it was cheaper to make them there than to keep the factory onshore.

But anyone suggesting back then that service centers could be housed abroad would have been laughed at. How could agents who interact directly with customers work halfway around the world, where monitoring the agents would be impossible and every call would be international?

With the advent of reliable and cheap global communications and the emergence of skilled labor forces in many developing countries, remote offshore services have become both feasible and real. Many banks and others in the financial industry have already moved IT operations abroad, and some have started "business process offshoring" efforts in which whole processing tasks are exported.

Early successes encouraged others to promptly follow suit, and by 2008 worldwide offshoring expenditures are expected to reach $346 billion.

Operating offshore is particularly attractive to financial institutions because their operations depend primarily on data, which is expensive to process here but easy to move. And since their savings can amount to more than 10% of noninterest expense, moving as quickly as possible to an offshoring model seems the obvious choice, right?

Well, yes – and no.

Offshoring has its strengths but is not a panacea. Institutions should ask themselves some questions: Which processes could actually be offshored – and what is the magnitude of the opportunity? Are these processes stable? Is the company ready for the disruption? Can important risks be identified and managed?

Whether you are exploring a pilot program or ramping up an established offshoring portfolio, it is critical that you work deliberately through these questions.

You want to offshore a number of processes. Can they be performed with just a PC and a phone, without your being physically close to other pieces of the value chain? Are they standardized? Are specialized skills required? Is there a sufficient scale? Will regulatory constraints allow offshoring? If the answer to all is yes, then the process is a candidate.

Take the mortgage business. Here much of the opportunity is in the data-intensive servicing functions. Insurance tax and escrow processing, early collections calling, and much of the customer service call-center function can be offshored along with at least a part of loan-service setup, post-closing documentation, manual payoff processing, account balancing, statementing, and refinancing. Many are considering offshoring select origination functions, including application processing, direct sales, credit scoring and approval, and verification of title. Overall savings could be 10% to 15% of noninterest costs.

A similar analysis of any company's corporate center would show that about a quarter of those positions are offshorable as well. So the savings can be enormous even if some operations are kept onshore for redundancy.

But remember: Offshoring is no antidote for underperformance. Indeed, what troubles performance onshore is exactly what will compromise – and be magnified by – offshoring. Thus, a second filter – is the company ready? Are the processes stable and completely under control? Are they well defined? When something goes wrong, does everyone know what to do? If the answers are yes, then it's time to think about location.

The criteria for an offshore location are the caliber and cost of labor; language skills; telecom bandwidth, cost and reliability; political stability and the enforceability of contracts; the general maturity of the business environment; and senior management's comfort operating in different locations.

If you need English speakers, two standouts are India and the Philippines. India is cheaper and has more English-speaking graduates, but the Philippines excels in the call-center space due to its close cultural connection to the United States. China offers low labor costs but a less mature offshoring environment and weaker English-language skills. Ireland, South Africa, and New Zealand have skilled workers in a mature business environment, as well as greater cultural similarities with the United States, but at somewhat higher cost. Finally, the Caribbean and Mexico offer moderate skill levels in the same time zone as the United States.

After what and where comes how: Do you set up a captive – a 100%- or majority-owned subsidiary – or outsource? Captives offer better long-run savings but require scale, a bigger up-front investment and closer management, and expose you most to local risks. Outsourcing is viable below scale and leaves you less exposed, but the vendor takes some of the potential savings. Then there is time – setting up a vendor-partnership can be done within six months, where a captive will take most of a year.

Then there are emerging hybrid alternatives: joint ventures where risk and return are shared; build-operate-transfer agreements in which the outsourcing firm builds a subsidiary for the parent, operates it for a while, and turns it over; and outsourcing agreements with a buyout option.

Companies often mix and match. For some functions you may lack the experience to set up your own operation. For others you may not want the risk. Many companies with offshoring experience use both captive and outsource arrangements.

Transitions are difficult. Technical problems crop up. Natural disasters, political intervention, and cultural differences can all compromise the effort. What can be done to mitigate these risks? It's a challenge, but with the right commitment from management focus it can be done.

Transition stress can be minimized by investing senior management time (in most cases by augmenting the existing management team); by offshoring well less than 100% of any activity, at least to start; and by maintaining some backup capacity onshore. Technological redundancy in hardware and telecom lines can cover for technical failures, and backup capacity in a second operation elsewhere can ensure against political risk.

Culture differences can be managed through exchange programs and by training the initial work force at domestic facilities. Most important is ensuring that all processes – from the work itself to process changes, all onshore-offshore interactions, and problem-solving – are clearly and fully documented.

The pressures are lighter when outsourcing rather than operating a captive, but they are still substantial. Companies must manage vendors closely for quality and cost -- the newness of the field has led to wide variability in terms, and some vendors have negotiated to give themselves very attractive margins.

The time difference, and some vendors' lack of experience, can be managed by putting small management teams on the ground.

Mr. Daruvala is a director at the New York consulting firm, McKinsey & Co.
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