|FROM ||Dave Williams
|SUBJECT ||Subject: [hangout] Outsourcing
The Impact of the Offshore Services Phenomenon: A Global Perspective
By Robin 'Roblimo' Miller
In a teleconference held June 5, 2003, IDC analysts said they expect
global outsourcing in the IT industry to increase, which will put smiles
on the faces of workers in China, The Philippines, India, Vietnam, and
Eastern Europe, but will continue to depress U.S. and Western European
IT workers. Except the French.
The presentation pointed out that the trend of moving as much work as
possible to countries with the lowest wages is not new. In the case of
the U.S., it started with apparel and electronics manufacturing in the
1960s, and the offshore trend in those industries has been so complete,
said one IDC person, that today "there is not one TV manufactured in the
Now IT hardware development and manufacturing, software development,
business process functions (like HR and customer service), and IT
services, including infrastructure monitoring and management, are
leaving high-wage countries.
IDC sees some political backlash in developed countries to the idea of
"exporting jobs," and expects legislation to be introduced in many
jurisdictions that will try to halt this movement. But IDC also believes
global companies will find ways around these restrictions.
According to a study IDC did in January 2003, fewer than 15% of U.S. IT
firms are opposed to using offshore workers, 20% prefer to use U.S.
resources, and about 65% are "open to using resources outside U.S."
IDC warns that Bangalore, India's primary IT hub, may no longer offer
the world's best IT outsourcing value; that the infrastructure there is
saturated; and wages for skilled workers are being bid up, with many new
grads demanding annual salaries of $4,000 (USD) or more -- not only in
Bangalore but all over India.
China is cheaper than India, but IDC people say it's not as easy to open
up a shop there as it is in India; that significant time must be put
into developing what they politely call "political relationships."
In Europe it looks like India, China, and other Far East nations are not
getting as much outsourcing attention as they are getting in the U.S.
The European outsourcing pattern looks like a wave moving eastward, with
most of the activity in the Czech Republic,Russia, Romania, and the
Baltic States (e.g. Latvia and Estonia).
Two European countries break this pattern: The U.K. has strong
historical ties to India, so India is an obvious outsourcing location
for U.K. firms. And, says IDC, "France's pride in local
software/services houses" leads most French firms to avoid sending work
out of the country even if it can save them money.
A strong discussion point was whether it is better for a company to open
a branch and hire directly in the low-wage country or to work
second-hand through local contractors. There was no clear consensus on
this; ownership and control have advantages, but working with a local
company reduces liability and may eliminate some political problems at
both ends of the outsourcing chain.
One notable trend, everywhere, is that small software and IT shops are
being snapped up by larger ones.
Another trend IDC notes is that the worldwide IT consulting industry is
under -- as they put it -- "severe downward pricing pressure." In other
words, everyone is trying to undercut the next one, not just in any one
country but everywhere in the world.
Yet another trend is that nearly every country with lower wages and
lower cost of living than the U.S., Canada, and Western Europe is trying
to get into the outsourcing business in one way or another, whether in
high-wage IT areas or by running lower-wage call centers, payroll
processing facilities, and doing other low-skill but necessary clerical
One factor that may reverse some of the process of everything moving
offshore, at least in IT, is advances in "utility model" on-demand
computing, which kills some of the advantages of having utility-style
computer centers in one country instead of another. However, not all of
IDC's people agree that this will make much difference, so the company
has no real "official" position here.
But IDC's people do seem to agree that on-demand computing is a coming
thing, and that it is an area that will be dominated by huge companies
like IBM, EDS, and others capable of operating data centers all over the
world and shifting resources to wherever they are most needed. And as
this business change takes place, IDC was saying, all local and regional
players -- whether in the U.S., Germany, China or India -- will have
Like it or not, work that takes no particular cultural tie -- what we
might call "generic telework" -- is going to move to the cheapest
possible place, and large companies with presences in many countries are
going to have a growing advantage over local and regional firms.
Another factor brought up is that cities whose populations speak a wide
range of languages and come from a large number of cultures will have an
advantage in some business areas. Vancouver, Toronto, Sydney, and
Melbourne were specifically mentioned.
Linux and Open Source were mentioned as a factor in making global
outsourcing easier, not necessarily in and of themselves, but because
they lower the entry cost barrier to the IT services business no matter
where you are.
And in a larger sense, as one IDC analyst put it, "Linux represents the
growing commoditization of IT in general."
This commoditization trend, IDC is convinced, will continue to be the
biggest factor in IT industry directions in the near future, with or
without global outsourcing. We are not going to see a return to the
"glory years" of 1998 - 2000 no matter what.
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