December 19, 2003, 4:25 PM — Industrialized nations have engaged in cross-border outsourcing for decades, but this year the issue came to a head for the world of IT, which has seen the debate about "offshoring" spill from technology circles into the realm of politics, macroeconomics and labor unions.
Controversy about offshore outsourcing, however, is likely to generate even more headlines in 2004, since corporate plans to increase outsourcing coincide with an increasing number of offshore outsourcers entering the global market.
What appears perhaps most threatening to the Western IT worker in the long term are efforts on the part of more experienced outsourcers to move up the labor chain, from basic programming jobs to high-end design and project management work.
In the U.S. alone, the value of IT services provided by offshore labor will double to US$16 billion next year and triple again to $46 billion by 2007, according to market research company IDC, in Framingham, Massachusetts.
Though India has up to now grabbed the lion's share of offshore work, competition is bound to heat up as more countries try to get a slice of the pie. One telling sign: at TechXNY in September, about half of the more than 180 vendors participating in the New York conference, one of the biggest business-oriented IT events in the U.S., were outsourcers. The bulk of those were from countries as far-flung as Bulgaria, the Philippines, China, Mexico and South Africa.
Companies that hope to siphon off some of the work that typically would flow to India say the cost of doing business there has risen, and that in some areas, the country's telecommunications and manufacturing infrastructure is not world-class.
China, for example, has more developed infrastructure than India, and Chinese companies can offer lower prices than their Indian rivals, especially for small and medium-size companies, said Xu Xiaoyu, vice president of sales and marketing at Shinetech Software Development Inc. in Beijing and a former consultant at Accenture Japan.
Shinetech, established in 2001, this year doubled in staff and tripled in revenue. It is on target to generate $300,000 in revenue and now has 50 employees, including 40 programmers who provide custom .Net and Java software development services to customers in China, the U.S. and Europe.
Xu thinks China's IT outsourcing industry is poised for big gains in the coming years.
"It has great potential, it could develop dramatically within a couple of years," Xu says. "The whole turnover of the market in China would be increased at least double in the next year or even three times or four times in the next several years."
Outsourcing to Chinese companies can save U.S. customers 50 percent or more on software development costs for "the same service with the same quality or maybe even better," Xu says.
Facing such competition, it's natural that the more experienced outsourcers are trying to move into high-end jobs.
"The opportunity seems quite unlimited, as customers are increasingly exploring newer areas for outsourcing to India," said Ravi Ramu, chief financial officer of MphasiS BFL Group, a software services and business process outsourcing (BPO) company in Bangalore.
The bulk of India's software exports so far have consisted of custom application development and maintenance. That is changing, as some Indian companies venture into IT consulting, systems integration, infrastructure management, global rollouts of software packages, and even product development for clients ranging from technology vendors to non-IT corporations.
"High value work that used to be retained in-house earlier, like design, R&D (research and development), and product co-development is being outsourced to Indian vendors that are able to prove their capabilities in taking up such work and delivering successfully, meeting global standards of quality and punctuality," said Ravindra Datar, principal analyst for IT services and BPO at Mumbai-based Gartner India Research and Advisory Services Pvt. Ltd.
The shift up the value curve seems to be happening faster in the wholly owned development subsidiaries of multinational technology companies in India.
Intel Corp.'s development center in Bangalore, for example, started off doing bits and pieces of development work and now has taken over responsibility for a new 32-bit successor to the Xeon chip that is aimed at the enterprise market.
"On the enterprise processor, we decided we will do it end-to-end from the start, starting with product concept and architecture, " said Ketan Sampat, president, Intel India, who added that the team developing the chip has a product architect whose job is to talk to customers worldwide and then work with the development team to define the processor architecture.
