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Outsourcing

More work is being sent packing, often far away. To make it pay off, management must adapt.
Polly Schneider Traylor, CFO IT
November 17, 2003

Is outsourcing on your agenda for 2004? Make sure your passport is handy. Offshore outsourcing of traditional IT work will grow 20 to 25 percent each year in the next few years, from its current market value of roughly $20 billion, according to Atul Vashistha, CEO of San Ramon, California-based offshore advisory firm NeoIT. TPI, a Houston-based global sourcing advisory firm that has worked on 550 large outsourcing contracts since 1998, says that nearly half of its 2003 deals had an offshoring component.

"Every client now wants to look at offshoring," says Dennis McGuire, TPI's president and CEO. The obvious reason is to reduce operating costs—by up to 50 percent in some cases—since hourly rates for workers in Asia and other emerging markets are anywhere from 30 to 75 percent lower than they are in the United States. Other benefits include improved quality among offshore providers to offer flexibility and 24/7 operating hours.

What will this mean in the next two to five years? First, the good news: global sourcing is causing downward price pressure on all service providers, domestic and foreign, which means customers will have the upper hand in negotiating deals, analysts predict. To compete on price with Indian providers like Infosys Technologies and Wipro Technologies, U.S. providers will need to open centers in India and elsewhere; IBM, EDS, Accenture, Hewlett-Packard, and Hewitt Associates have led the charge.

Now for the troubling news: experts say that growth in global sourcing will transform the U.S. workforce. "In 5 to 10 years, a majority of Fortune 100 companies could have 50 percent fewer employees," predicts McGuire. Forrester Research forecasts that 3.3 million U.S. service-industry jobs will go offshore in the next 15 years.

Bye Techies, Hi Management
Analysts warn that internal management costs can offset some of the savings of offshoring. Some estimate that companies are now saving at most 15 percent overall, although as large outsourcing providers leverage their global networks, savings could run as deep as 40 percent.

Beyond cost savings, customers are asking for a more integrated knowledge of processes and functions. Mark L. Gordon, a partner specializing in outsourcing contracts at Chicago-based law firm Gordon & Glickson, says providers will soon take over entire business functions, like human-resources IT, giving rise to what Forrester calls "process-centric IT."

With service providers vying for every piece of the IT department, including analysis and process management, who will remain on staff? Experts agree that IT departments will still need senior managers who understand strategy, culture, and industry-specific processes. One of the major outsourcing barriers experts cite is a lack of proper governance structures and performance measures. Typically, organizations have only one or two individuals managing these large contracts, and oftentimes internal processes are dysfunctional to begin with, according to TPI's McGuire.

Going forward, CIOs will need to craft stronger, metrics-driven partnership models with service providers—particularly if those providers are in far-flung locales. Inevitably, a new C-level position is being advocated by some—in this case, "chief resource officer," described by Forrester as a "corporate power broker" alongside the CIO, CFO, and COO. The IT skill-sets most likely to remain in-house: application design and integration, enterprise architecture, information management, client-facing process management, and business integration, according to Gartner.

Next Year's Model
And business-process outsourcing (BPO), in which companies contract for services ranging from HR record-keeping to basic accounting to airline reservations services, will explode—from $110 billion in 2002 to $173 billion in 2007, according to Gartner. In June, an Accenture/Economist Intelligence Unit survey of senior executives at 236 global companies revealed that 30 percent outsourced finance and accounting functions. Indeed, those jobs are now among the most common to be moved offshore. In the future, the focus will be less on offshoring discrete processes within a department and more on moving the entire function (all of HR, for example) offshore.

But that will take time. Analysts say most outsourcing providers, whether domestic or offshore, lack the expertise to provide a full set of integrated services in HR, accounting, or what have you. Vendors want to address bigger portions of the whole—Keane's acquisition of BPO firm Worldzen last month is but one of many examples of growth-through-acquisition defining the market—but specialization rather than broadly integrated services will remain the norm.

To hedge their bets, smart companies will focus on developing a true global delivery model: hiring multiple vendors in multiple locations, depending upon which can provide the best quality at the best price for each service.

If industry predictions come true, the day may come when the very idea of a corporate headquarters is passé. Already, when you call a senior executive at some U.S. companies, the call is patched through to an administrative assistant in New Delhi or Manila. As Sapient Corp.'s co-chairman Jerry Greenberg notes, "We're not just outsourcing commodities anymore."




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