Plotting the best course

It is possible to navigate your way successfully through an offshore outsourcing deal if you take care

With more than 70 countries now promoting themselves as centres for outsourced IT services, technology leaders have an abundance of options for tapping into low-cost overseas labour.

The offshore outsourcing market has matured rapidly over the past 15 years, according to Gavin Bowden-Hall, chairman of the offshore and outsourcing group at industry body Intellect, and the decision to go down this route can be influenced by a range of business drivers.

“Savings are still there to be made,” he says. “In particular, if businesses see the advantages to be gained from chasing the emerging cloud technologies and delivering software as a service.”

Recent years have seen some major changes in the outsourcing market. Indian service providers became the poster children for the industry, helping establish the reputation of offshore providers both in terms of service quality and cost.

India, however, is no longer as low cost as it used to be. Thanks to wage inflation, the cost differential between India and the UK has narrowed markedly, says Ed Thomas, an analyst at Datamonitor.

Nevertheless, when comparing like-for-like skills, India is still cheaper than the UK, and has a range of talent available that few other locations can match.

“There is wage inflation,” says Thomas, ”but it would have to continue for a good few years to catch up with the West.”

Trust has also become an issue. The recent financial scandal at Indian IT services provider Satyam sent shockwaves through the sector. After its chief executive revealed the company had been cooking its books for several years, investigators were called in, some high-profile customers fled and the company was recently sold to smaller rival Tech Mahindra.

“It was a well-respected firm with huge global contracts and a high profile with its World Cup sponsorship,” says Thomas. “There will be a lot of difficult questions asked.”

Ultimately, Satyam will probably turn out to be a lone operator, says Andy Jackson, IT director with life insurance company Friends Provident. His company was not a Satyam client, having signed long-term deals with India’s Wipro and IBM. Nevertheless, the Satyam case gave him pause for thought.

“There is a risk with offshore outsourcing and you have to be careful with your due diligence,” he says. “It’s about how much confidence you have that your partners are going to be in place in 12 months’ time.”

The global downturn has had a major impact on the offshore outsourcing industry. With many firms cutting non-essential IT projects, the demand for consulting and systems integration skills has fallen. Meanwhile, demand for projects that promise potential cost savings, such as finance and procurement outsourcing, has picked up, encouraging new entrants into the market.

Meanwhile, different regions are emerging as centres of excellence catering for particular requirements: Philippines for call centre expertise; Russia for mathematical and programming skills, and Sri Lanka for finance and accountancy services.

“There is a trend to multi-shore, with India as the main hub and then using near shore ­ – Latin America for the US and Eastern Europe for the UK – ­ in order to spread the risk,” says Datamonitor’s Martin.

Martyn Arbon, chief technology officer of online recruitment specialist StepStone, has been outsourcing IT services for more than 11 years within a number of different organisations, and recognises the emerging global areas of aptitude.

“Different countries have different strengths –­ Vietnam is strong on the Microsoft Platform, while in Poland it is easy to get PHP skills,” he says.

But many companies looking for locations with a ready supply of skills fail to spot the opportunities closer to home, Arbon argues. “At the moment in the UK you can get a wide variety of skills.”

According to Arbon, there has been a definite shift in terms of cost and availability when it comes to employing home-grown IT talent.

“A year ago the UK wasn’t the place to hire IT people due to the cost. Today it’s a different story ­ – there is an abundance of talent at a reasonable price, but it’s concentrated in the south east. StepStone is taking advantage of the fallout from the banking industry and can acquire highly skilled IT professionals who are immediately available.”

StepStone’s philosophy is to use the strongest talent wherever its located ­ – offshore, nearshore or round the corner – ­ through a mix of outsourced and in-house arrangements.

The recession has focused business leaders’ minds on their firms’ ability to react to changes. Potentially those changes could include the political acceptability of offshore outsourcing, suggests Intellect’s Bowden-Hall. As UK labour becomes cheaper, the exportation of work, whether contact centre services or technology development, may slow down.

“Sourcing IT is now a very mixed economy, blending all the characteristics of in-house, near and far shore,” says Bowden-Hall. “There is no one-size-fits-all, and just as it is high risk to have all your money in a single investment so it is the same for IT. Corporates are packaging and sourcing their technology in different ways to reduce risk and offer more choice. However, it does need strong relationships and integration management to make it work.”

But Datamonitor’s Thomas believes that the cost argument will still outweigh any political concerns for most enterprises. “While a bit of protectionism may come back into the debate, it’s not going to stop people from going offshore to reduce costs if it saves their business,” he says.

Outsourcing in its broadest sense is increasing –­ in good times companies use it to grow the business and when times are tough it is a tool to contain costs and take advantage of economies of scale. As the concept of cloud comput ing takes off, even more infrastructure management will go offshore.

Business-critical technology that contains, or requires, increased levels of intellectual property is less likely to be outsourced. But mainstream back-office technology supporting non-complex transactions will continue to benefit from the lower costs of development, support and maintenance that can be provided by an offshore partner.

Go to page two for successful offshoring tips and the lowdown on current trends

In next week’s issue, Computing will examine how leading organisations go about sourcing IT services from around the world