Reshuffling the Outsourcing Deck

Lower costs, better results. There’s the four word outsourcers’ mantra and, inevitably, what this means in tough times is companies are on the prowl for more, for less money, from their outsourcing partners. And that just may mean new geographies emerging as prime locations.

One reality: India remains the hub for most U.S. outsourcing initiatives, said David Etzler, CEO of trade show producer Outsource World. “But most large outsourcers are also now looking beyond India, too.”

Consulting firm Hackett’s Chief Research Officer Michel Janssen elaborates: “India is a proven player” and a sad lesson learned in outsourcing 1.0 was that the lowest priced deal wasn’t always the best. As outsourcing 2.0 matures, said Janssen, companies recognize that bidders low balling India still might not be better. Not when work quality, dependability, and the rest of the criteria get factored in.

“With other locations there are risks involved,” said Janssen.

The other reality: so much IT work is about to be outsourced by companies seeking to achieve deep cost savings India won’t be able to handle it and more geographies necessarily will come into play. Hackett estimates that roughly 15% of U.S. IT work is performed offshore. In the drive to cut costs, Hackett sees that percentage gaining by roughly half just in the next two years. “We believe 21% of IT will be globalized within two years,” said Janssen. He adds that a similar gain in outsourced financial sector work―simple accounting, invoicing, collections―is in the offing. “We see finance outsourcing 21 percent of its work within two years, up from 10.5 percent today.”

That dynamic means that, despite the recession, phones are ringing loudly with new orders at leading outsourcers. Then there is the―surprise―non-starter of another locale once thought to be hot. “We just aren’t hearing that much about outsourcing to Eastern Europe these days,” said Etzler, and that is a major change from three-to-five years back when many companies were eye-balling possibilities in Russia, Ukraine, and the Baltic republics. No longer apparently. The experts indicate they don’t know why Eastern Europe has fallen off the outsourcing grid, just that it has.

What about China? Nobody counts China out for IT outsourcing but persistent cultural issues (consider the suicide of a worker in Apple’s iPhone factory in Shenzhen last July) have kept China out of the fast-track for outsourced white collar work.

Beyond China and Russia, however, just about any other place might be “in” as a world-is-flat search for quality work at the right price is breaking down borders. Consider Bogota, Colombia where, said D. J. Edgerton, CEO of New York-headquartered website development company Zemoga, his team of 80 are building websites for worldclass companies such as Toyota, Sears, and K-Mart. Narco-trafficking is out in Colombia, building a middle class is in. And labor costs for U.S. companies that go to Colombia are remarkably low. Edgerton said money is why the work goes south of the border. “Costs, salaries in particular, are one-third to one-fifth of what we would pay in Manhattan.” He claims he hires first-rate HTML coders at $10,000 per year.

Lower costs also drew Ken Moss, CEO of software developer One Software, to Hanoi in Vietnam, but that was after he’d tried Beijing, looked in India, and contemplated doing the work back in the good ol’ USA. But Hanoi is where Moss now uses 40 people to write the custom apps for One Software’s clients. “It’s deep in the Vietnamese culture to work hard,” he said.