Outsourcing: A love / hate relationship for U.S. I.T. professionals. Ask the average employee in any I.T. organization, and hearing about fear of jobs going to India and China is almost unavoidable. Although many have started the move toward business service management (BSM) to address the chaotic labor trends, I.T. labor itself still consumes over one-third of I.T. budgets. This figure is perfectly in line with a recently published Gartner report stating that 37% of the typical I.T. budget goes directly to personnel costs. What are you as the CIO going to do to manage this frenzied situation? Is outsourcing, or “offshoring,” the answer?
How can you outsource your operations to a foreign country and still maintain compliance with best practice frameworks such as ITIL or MOF? How do you maintain Sarbanes-Oxley, PCI, or HIPAA compliance when utilizing 100% offshore resources with far less control?
Almost everyone in the I.T. sector has at least one story about various operational tasks being “offshored” to India, and no call-center, network operations center (NOC), or infrastructure team has been immune to rumors of jobs going offshore. No longer are the cities of Mumbai and Delhi simple manufacturing hubs and suppliers of raw materials. The country is home to some of the largest corporate call centers and development centers in the world. In late 2005, the Indian outsourcing workforce numbered 350,000 individuals. That total is now estimated at well over 800,000, with many new positions going unfilled due to the lack of qualified candidates.
Eleven years ago this month, USA Today published an article titled “Can political instability be eliminated in India?” Looking solely at the news of the past six months, the answer to that question is an obvious NO.
The trend toward a twenty-first century India has not fostered the sort of sweeping political change one might expect from the world’s most populous democracy. Moreover, the unwillingness of the Indian government to more robustly combat intellectual property theft is the stuff that causes your legal team to lose MANY nights of sleep.
Recession has made its way to India as well. The 4 December 2008 issue of The New York Times ran an article discussing the wave of outsourcing firms scaling back their daily operations in India due to the unhealthy global financial climate. As of this week, the Indian rupee is at a record low.
India makes a strong case as the “global back office,” yet it has failed to produce an environment supporting front-office operations such as product innovation and corporate strategies. The prevailing thought of the past 5 years has been that Indian outsourcing firms are masterful in the art of efficiency and product development measures. What about now?
On 7 January 2009, Indian stocks took a nosedive in the wake of announcements by Satyam Computer Services that corporate profit summaries had been inflated for several years. The announcement by Satyam’s chairman and co-founder that he had directly falsified accounting documents on an ongoing basis has thrown the entire Indian outsourcing industry into dramatic turmoil. As a provider of back-office services for many of the largest banks and healthcare institutions in the world, the result of the SATYAM crisis is nothing short of devastating.
By Friday, January 9, 2009 news sources were reporting that interim CEO Ram Mynampati does not have faith that the firm can continue past the next few weeks. Mynampati stated they were working to find the liquidity to pay current employees, suppliers, and creditors.
In less than a week, the crisis has crossed the Pacific Ocean and hit U.S. shores. Auditing giant PricewaterhouseCoopers is expected to pay a hefty price for the emerging fraud. The auditor has been responsible for Satyam financial oversight for over eight years, and Satyam investors are expected to go to court in attempts to recoup losses. According to legal sources from within India, most are likely to attack PricewaterhouseCoopers directly rather than Satyam.
The tragic events of November 2008 in Mumbai clearly show that the concerns go much deeper. Over 200 people were killed in the attacks, and the entire central business district in Mumbai ground to a halt for several days, resulting in billions of dollars in lost labor. Within one week of the attacks, five high-profile Indian cabinet members were forced to resign. On 1 December, TIME magazine posed the question “Will India’s Government Survive the Mumbai Massacre?”
Many companies are selecting alternate destinations, and some trends show an actual migration OUT of India to other knowledge-rich environments such as Singapore, The Philippines, Armenia, Pakistan, and various Latin American countries. Companies requiring less interaction with the public (for example, a software development center) may select destinations where English is not the primary language, or in some cases, is not a language spoken at all. Companies building public-facing operations such as helpdesks or call centers are being forced to reconsider earlier decisions, and many are moving to more English-centric countries like Taiwan and the Philippines.
Key players are making a strong case for themselves as these trends develop. In the Western Hemisphere, Costa Rica and Peru have marvelous records of rock-solid software development and high customer satisfaction ratings. In Europe, Armenia is emerging as a major powerhouse and model of efficiency. In Asia, many are discovering that the almost-perfect English spoken in Taiwan and the Philippines combined with some labor costs equal to or less than those in India make each a destination of choice. In fact, the November 30 edition of The New York Times Magazine featured a four-page article touting the viability of the Philippines as a premier outsourcing destination.
While China, Russia, and Korea have fantastic talent pools, the labor cost and in some cases difficulty dealing with local and national governments make them less attractive to some U.S. based companies.
While being one of the lesser-mentioned yet more historically colorful European countries, Armenia is a virtual strongbox of extraordinary talent. As mentioned by the CIA World Factbook, 18% of Armenia’s current population is under the age of 15, meaning the talent pool is poised for huge growth.
Armenia declared independence from the former Soviet Union on 21 September, 1991 and is now a bastion of political stability (a particularly attractive factor for the O&O industry). A healthy GDP real-growth rate of 13.7% makes Armenia one of the top producers in the EU.
Additionally, Armenia is rapidly becoming a major challenger in the index of relative economic freedom. As reported by the Heritage Foundation, the change has been nothing short of amazing. In 2000, Armenia ranked 84th in relative economic freedom. As of late 2008, Armenia ranked 28th – ahead of European powerhouses Spain (31st) and France (48th) and just behind Sweden at 27th.
Hong Kong ranked #1 on the list for 2008, with the U.S.A. at #5.
The appraisal of economic freedom is based on 50 economic indicators within the following categories: capital flow and foreign investment; financial systems; monetary, budget, and trade policies; salaries and prices; government interference in the economy; property rights and regulations; and black markets.
Many outsourcing experts are finding a presence in Armenia quite successful for many of their clients and partners. The cooperation offered by the Armenian government to ease immigration and visa restrictions for executives and other technical employees traveling between Armenia and the United States has been a huge advantage to many, and this is compounded by great satisfaction with the talent pool offered by this European country.
Having a stable presence in Armenia is but one example of alternatives to the current Indian instability. There are numerous other alternatives as well, and diversification is going to be the keystone to success over the next few years.
As pointed out by one CEO, “…the logical approach for today’s global economy is to diversify. Many of my contacts who previously invested heavily in Indian resources are already asking for new alternatives, and we believe the best approach is to simply avoid the old cliché of “putting all the eggs in one basket.”
Singapore has emerged as another destination of choice, with an extremely stable economy and government as well as strictly enforced laws on intellectual property rights. Perfect English is widely spoken, and the country is considered one of the top-five technical innovators in the world.
Originally founded as a British trading colony in 1818, Singapore joined the Malaysian federation for a short two years ending in 1965. Now completely independent, Singapore is undeniably one of the most prosperous, diverse, and cosmopolitan destinations in the world and has a per capita GDP greater than that of many “leaders” in Western Europe.
In 2006, the World Bank rated Singapore as “the most business-friendly economy in the world.” Immediately behind London, New York, and Tokyo, Singapore is the fourth largest foreign exchange trading hub in the world.
The country is home to three major state universities: The National University of Singapore, Nanyang Technological University and Singapore Management University, resulting in a literacy rate over 93%. The island nation accomplishes it all with a geographic size only three times that of Washington, DC.
The Philippines and U.S.A. share not only a very similar legal system but the English language as well. Companies in the legal sector consider this fact especially attractive. Once a U.S. colony, the Philippines has a workforce that is already familiar with many legal factors not readily obvious to those in countries with less of a seasoned relationship with the United States.
A few facts about the Philippines:
- Population of 91,000,000 as of 2008
- 550,000 college graduates per year on Average
- Educated labor pool of Over 30,000,000
- Entry-level I.T. salaries average $2500-$8000 USD P.A.
- Top-quality CBD real-estate costs average $17 PSF
- 95% literacy rate
- English as a primary language
In 2003 the world’s largest law firm centralized systems operations and support in Fort Bonifacio Global City in the Philippines.
The initiative has been so successful, the service has grown hundreds of staff covering Systems Operations, Service Desk and Development as well as Document and Legal services.
Scott Noble, NOC creator and former Director said “We had 35 countries with existing offices to chose from. Philippines turned out to be perfect because of it’s cultural ease, time zone, infrastructure and most of all, it’s wealth of top notch IT talent. The skill and professionalism of the staff we selected is outstanding. I can’t imagine achieving what we did with anywhere near the same time or budget in the other countries we compared.”
From 1997 to 2008, companies such as Citibank, Fluor, IBM, Convergys, Telus, HSBC, Dell, JP Morgan, Siemens, and Deutsche Bank have all opened major offshore facilities in the Metro Manila area of the Philippines.
More than just a country filled with call centers, the Philippines is home to dozens of offshore operations involving network operations, wireless services, energy, shipping and logistics, legal and medical transcription, finance and accounting, and software development.
The country is now recognized by some as the top destination of choice in Southeast Asia. In 2006, the country generated in excess of $3.0 billion in outsourced operations, and that figure is expected to more than double by the end of 2009. The Philippine government has targeted a global market share of 8 to 10% in the O&O market by 2011.
Regardless of where you go, there is no “single best answer” to every situation. When looking for that “trusted advisor” to help you make your next outsourcing, offshoring, development, or infrastructure decision, you need a firm with the knowledge, process, devotion, and proven direction to make it a success.
Only by in-depth knowledge of your core business can any firm help in an effective O&O engagement. You need a firm that endeavors to understand and optimize how the process will enhance not only the I.T. department, but all other business units as well.
O&O will continue to gain momentum over the next few years, regardless of what happens in the Indian subcontinent. The recent events in India and the surrounding territories are but a small stumbling-block to an ever-evolving global business model.
Businesses today realize that three very important factors have emerged in the outsourcing and offshoring industry:
- O&O cannot and should not be based on the “one size fits all” methodology anymore. Diversification is the key.
- Every situation is different.
- Unless you are prepared to invest in learning foreign tax and H/R systems, unfamiliar holidays, unique infrastructure, governmental regulations, and possibly a few foreign languages, you NEED a trusted advisor on your side.
Companies and their investors who spent the billions of dollars (and thousands of man-hours) building outsourced operations based solely in India have found that trying to separate the technology from the actual business process is not only foolish-it is futile. Outsourcing and offshoring can provide limitless possibilities, but they must be done with precision , care, and proper distribution.
Rather than outright withdrawal from offshoring operations, now is the time for diversification.
“There is timing in the whole life of the warrior, in his thriving and declining, in his harmony and discord. Similarly, there is timing in the Way of the merchant, in the rise and fall of capital. All things entail rising and falling timing. You must be able to discern this..” – Miyamoto Musashi , 1645