Egypt, Offshoring and the Cloud

All eyes have been on Egypt for weeks now yet few saw it as the beginning of the end of offshore outsourcing as we know it.

“Had India unplugged the Internet, companies worldwide would be hard at work reconfiguring their offshoring strategy,” said Barry Carter, a CIO for 10 years at AirTran, Capital One, UnitedHealth and Alliance Data, prior to taking his current post as EVP of IT Services at Fujitsu America.

But, since it was Egypt, a peripheral player in the outsourcing ecosystem, a threat to businesses around the world went largely unnoticed.

“One would think unplugging the Internet would cause people to think, ‘Wow this is a real possibility now, maybe I should consider that in my overall risk assessment’,” said Carter. “But that largely hasn’t happened.”

In fairness, the government overthrow in Egypt is generally being hailed as a good thing, even though no one has a clue who will rule next. You might find comfort in the fact that the guy that unplugged the Internet was canned and sent home. It feels like the threat is gone and the war is won. But it isn’t. Now other government leaders know that the Internet, the lifeline of businesses and global economies, can be disconnected. There is even a proposed law in the U.S to grant the president an “Internet kill switch” of his own for use in a “national cyber-emergency.”

Yet, the only ones attuned to Egypt’s pull of the plug and its potential to drain profits gained via offshoring were outsourcing’s big players. Several in India, already nervously eyeing the cloud, quietly wondered if Egypt would put the hex on outsourcers everywhere. Could it be that Egypt would power the force of the cloud as no other event had or could?

How the cloud trumps offshore

Keep in mind that one of the biggest advantages of offshore outsourcing is labor-arbitrage, a sanitary term for cheap labor. But labor is not something companies want to hang on to since it tends to be the highest cost a business has no matter how cheap it is.

“Cloud computing essentially defines the next generation for service delivery,” said Tony Viola, VP of Marketing at Patni, an Indian outsourcer founded in the 1970s. “Its biggest impact is on traditional labor-arbitrage outsourcing approaches that leveraged the availability of good resources inexpensively.” Put simply, this means that cheap labor is becoming too expensive compared to cheap automation in the cloud.

While personnel are very much a part of the cloud computing ecosystem, “the skill sets required and their sourcing will become increasingly more complex” warns Viola. He cited for example a testing-as-a-service (TaaS) offering that supports CRM application development. That kind of service requires personnel knowledgeable in all facets of the offering.

“The best and brightest support may not come from one country or even one company, but may be a team of geographically dispersed experts that become virtual communities,” he said. “Traditional outsourcing firms who are delivering their services using a cloud based model will need to adjust their talent acquisition strategy accordingly.”

The bottom-line is that the cloud will allow companies to hire talent regardless of geography thus reducing the risks presented by geopolitical turmoil and a head of state with a penchant for pulling the Internet plug. Even if a corner of the Web goes dark, the very nature of the cloud means that business can continue with little more than a blip of interference. Centralized outsourcing firms can’t compete with that.

Reversal of fortunes

Cheap labor will become less of a factor and more expensive talent could see a rise in demand. “Its talent dependencies require cloud providers to be able to adopt an ‘anyshore’ strategy in order to tap personnel with specific skills that may come from any point in the world,” explained Viola.

Such news will rock economies with cheap labor and buoy their opposites. But neither the cloud nor outsourcers are targeting either outcome, it’s just a matter of evolving to survive. “The classic outsourcing body shop will be required to transform and target their value proposition to service higher value deliverables to their customers,” said Mark Popolano, senior advisor at Kurt Salmon, a global management consulting firm specializing in retail, consumer products, and healthcare.

“Certainly Indian-based outsourcers are nervous about the cloud,” agreed Ben Pring, an analyst at Gartner. “Automation eliminates a lot of jobs and they are nervous about that. But in reality it is hard to argue that the cloud will become material enough to dilute outsourcing in the near-term.”

Indeed, by all accounts, outsourcers have five to ten years to brace for impact. But there will be early cloud adopters that look at Egypt and undoubtedly decide that a geographically dispersed workforce is far less risky. The pressures to reconstruct the outsourcing model and leverage the cloud are inevitable.

“Cloud services are moving in fast to try to fill the mundane services offered by outsourcing outfits and, if outsourcers don’t react quickly, they will be in trouble soon as cloud services increase in breadth and depth,” said Laurent Duperval, president of Duperval Consulting in Montreal, Canada. “But just as there are economy cars and luxury cars, there will be the same types of cloud vs. premium outsourcing services. Success will depend on how well providers can stand out in the crowd.”

New sourcing paradigm

The cloud is already affecting outsourcers to a considerable degree. “Cloud-based services will change outsourcing contract methodologies,” explained Sadagopan Singam, VP of Cloud Computing at HCL Technologies, an offshore IT and software development company. “Buyers will move away from long-term contracts where ROI depended on continuous improvement,” he said. “They will move to shorter-term contracts with more flexibility to quickly buy new services.”

Such a move hampers outsourcers in that they will no longer be sure of their revenues since their backlogs (the amount of business committed for the year at the beginning of the year) are beginning to dwindle.

“Contract cycles and agreements will have to be revisited as niche core cloud service players will go after the buyers as contract renewal approaches,” said Singam.

Fixed contracts will come under fire as demand for variable contracts increases. “Traditional vendors will have a problem as their models are based on one-time fixed with incremental charges while, with hardware/software costs dropping dramatically, customers will end up paying more,” he said. However, well-run offshore firms “shall see net positive opportunities with large enterprises embracing the cloud.”

He may be right. According to The Hackett Group, a global strategic business advisory firm, acceleration of offshoring is expected to drive a jobless recession in IT in the U.S. and Europe through 2014 and beyond. More than 500,000 corporate IT jobs in the U.S. and Europe were lost in IT in 2008 and 2009 alone due to a combination of offshoring, productivity improvements, and lack of economic growth. Another 600,000 IT jobs are set to disappear between 2010 and 2014.

“Offshoring is becoming a larger and larger factor in this trend with each passing year,” said Tony Chauhan, senior research director for The Hackett Group.

But then along came Egypt to pull the plug on the Internet and in so doing leave traditional outsourcers with a new boogie man in the closet. But, like in the best of horror movies, most of the players are blissfully ignorant of his lurking. We’ll have to wait for the story to unfold to do a body count and for the survivors to emerge.

A prolific and versatile writer, Pam Baker’s published credits include numerous articles in leading publications including, but not limited to: Institutional Investor magazine,, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, NY Times, and Knight-Ridder/McClatchy newspapers. She has also authored several analytical studies on technology and eight books. Baker also wrote and produced an award-winning documentary on paper-making. She is a member of the National Press Club (NPC), Society of Professional Journalists (SPJ), and the Internet Press Guild (IPG).