June 17, 2013, 1:13 PM — IT services customers are increasingly looking for onshore delivery options, either to replace or complement their offshore outsourcing relationships. A May 2013 Gartner report predicted continued growth in onshore delivery to satisfy buyer needs for proximity in projects that deliver greater business impact.
Indeed, key industry players from U.S.-based multinationals to Indian providers to specialized domestic providers have increased their presence on American soil.
But IT service providers of all types face significant challenges in expanding their U.S.-based staffs. Those challenges include an aging workforce, availability of the hottest technology skills, and the capability to scale to meet customer demand.
One strategy to overcome those issues is partnering directly with local universities to build the IT career programs capable of providing the kinds of talent IT outsourcing providers will need stateside in more significant numbers. IBM Global Services, for example, has invested in a high-performance computing center at Louisiana State University as it seeks to expand its Baton Rouge delivery center.
CGI has forged relationships with Ohio University and Hocking College to support its Athens, Ohio, operation. Eden Praire, Minn.-based Eagle Creek Software Services and the state of South Dakota, in conjunction with the University of South Dakota, have launched a new scholarship program to bring 1,000 IT jobs to the state in the coming three to five years.
CIO.com talked to Ken Behrendt, President of Eagle Creek, which operates project delivery centers in the Dakotas and Minnesota, about growth in both rural and urban U.S.-based sourcing, growing dissatisfaction with the offshore model, the real problem with Gen Y, and how immigration reform might impact the domestic outsourcing space.
Who is your typical customer?
Behrendt: Our primary services are front office software implementations, like Siebel and Salesforce. We offer java and mobile development, data warehousing, and business intelligence services. Our typical customer has revenues in the $5 billion to $60 billion range.
Your focus is on lower-cost domestic delivery. Why might a buyer come to you vs. a multinational like Accenture or IBM or the Indian service providers?
Behrendt: Our typical customer has either had its own offshore presence or have contracted out to a third party offshore. They recognize, for any number of reasons, that offshoring front office development either isn't working or won't work and they ask us to step in.
Eighty percent of our customers have some type of operation in India, but as soon as they move to a large front office implementation -- these are typically $5 to 20 million dollar implementations of over 1,000 users -- they're no longer willing to take the risk offshore. They may want to do agile development or the deployment isn't conducive to the offshore model. They may be dissatisified with the quality or the effective cost. A $25 hourly offshore rate doesn't really translate to a $25 rate.
But many of the biggest players offshore also have a growing U.S. presence. Why don't these customers simply approach their incumbent providers about conducting these projects at their onshore delivery centers?
Behrendt: That's what we would call 'dressing up the pig': putting a front-end on a back-end to make it work. But the front-end has the same type of problems as the back-end in terms of moving to agile or getting close to the business. Even if the provider puts people onsite, it's still not going to work.
You have three established project centers in the U.S.-- in North Dakota, South Dakota, and Minnesota. But you also maintain a presence in Chennai. What work do you send offshore?
Behrendt: Our Indian operation supports our U.S. centers. We push our testing (except for lead testing) to Chennai. If there are certain risk areas like data conversion or migration with a project, we staff up in Chennai to handle that. We also do off-hours support in India.
How do your offshore-weary clients react to your India-based support?
Behrendt: Once they get involved with our U.S.-based project centers, within 30 days, their attitude about location changes to 'We don't care where this is done. Push it where you need to push it.'
There are a number of labor challenges to deal with in the U.S. The most experienced middle managers are aging and dropping out of the IT talent pool. Keeping current with the latest technology skills -- cloud, mobility, analytics, social -- is difficult.
Behrendt: The aging workforce is a hot topic everywhere you go. We recruit more experienced, older workers in places like Minneapolis. They're settled and probably fit in better in the urban environment. We recruit them and they will continue to be a source of labor. The recessions killed them financially. They're still putting kids through college. They have an economic incentive to work harder. It's a good source, but not the best source.
Over the last nine years, the best source of new skills for our U.S.-based project centers has been Gen Y employees -- those between the ages of 21 to 30 years old. They're highly adaptable and willing to work in what we call our "rural" centers in Pierre, S.D. or Valley City, N.D. Technology skills are not the problem.
Anyone who has a kid that age knows what the problem is. They went to a tier-two or three university, say Iowa State or the University of Minnesota, Duluth. They got an education, but need us to provide vision for their career. As an employer, we have to help them develop and execute that vision. We have to help them mature.
How about the scale issue. How can domestic sourcing providers compete with providers in India with its enormous labor pool?
Behrendt: There's been this belief over the last 15 years that India has an unlimited labor pool. If United Healthcare needs 1,000 people, the belief was they could only get that level of support in India.
But we have plenty of resources in the U.S. We can recruit 1,000 people. Supply is not the issue. The issue is the concentration of services. How do you put 1,000 or 2,000 or 5,000 professionals in one particular area and hold on to them?
To scale, you have to do that in smaller metropolitan areas where you can bring those bodies in, where you're not inhibited by issues like housing or infrastructure. That's why we're opening a center in Vermillion, South Dakota, in 2014, along the I-29 corridor between Fargo and Sioux Falls. A million people live there and we can build a 700-person center.
Your IT Consultant Academy at the University of South Dakota will accept its first full class this fall. How will partnering with the university help you to overcome staffing and scale issues?
Behrendt: It's all about the production of resources. We want to get potential employees as prepared as possible so we have to provide the least amount of post-graduate training we have to. The IT Consultant Academy gives a student a semester's worth of IT classes paid for by Eagle Creek. The state of South Dakota is working with us on this because they want these students to stay and become the next generation of taxpayers.
We expect university systems across the country to start building these kind of programs and we want to scale faster than them. We want to be a destination.
What impact do you think immigration reform, if it passes as written in the current Senate bill, will have on the IT outsourcing industry. Would such reform be beneficial to you?
Behrendt: I was president of an offshore company fifteen years ago. At that time, many companies broke every law under the sun to bring offshore resources to the U.S. Today, a majority of temporary visas go to offshore outsourcing providers but very few turn into green cards.
That tells me that Indian companies are bringing people over to solve their back-end problems, and the U.S. government is subsidizing that. If the intention of the visa program is to bring the smartest people over to become U.S. citizens, it's not working.
If the new visa rules say you can't bring those workers over at the same levels, that will certainly facilitate the success for those of us building an alternative to the traditional offshore model. But I think the back-end of the offshore model has enough problems with or without visa reform, to fuel the movement of some proportion of that work back to the U.S.
I'm not anti-offshore. I'm a believer in more balanced global deployments. There's a place for everything.