Outsourcing & Economic Democracy
Offshore outsourcing is irresistible. A fact of life, a business essential. Not only because everyone’s doing it. But because the underlying economics will determine the future of your enterprise. Your Company, however big or small, is global- whether you like it or not.
That’s Not a Country Sir- It’s Your IT Department
5 years ago, offshore IT outsourcing was widely considered a multi-national experiment, an afterthought to overseas manufacturing. The developing world was far behind-and headed south with corruption, mismanagement, instability and conflict- a far cry from the rosy growth outlook of the 50’s and 60’s. The events of Semptember 11th obviously, didn’t help.
Today, offshore outsourcing is as stated earlier- a business essential. The worldwide market for offshore IT spending for (predominantly) U.S. and European companies will reach $50 billion by 2007, according to Gartner, a consultancy, and is growing in double digits. While the bulk of the work has been captured by India (in 2004, more than half the Fortune 500 companies outsourced some of their information technology work to India) a growing amount is trickling throughout the region into Pakistan, China and Bangladesh. Companies are starting to see the potential of outsourcing their IT development to these regions as well as others (South America for instance). It isn’t unlikely to find the “best of the best” in a less popular region for less money than it would take to remotely employ an entry level candidate in a hotbed like India. Better quality can be found at substantial cost savings when moving away from the outsourcing giants.
Outsourcing is Good for American Businesses…
The growth of offshore outsourcing is a good thing for the U.S economy and the world economy because it democratizes the rules of prosperity. U.S. businesses have growing access to global resources at a fraction of costs. For middle-market and small business in particular, the emergence and availability of offshore resources presents a tremendous opportunity to remain competitive by lowering the cost of business operations, research, innovation and customer service. After all, what’s more American than small business?
As for the fear of domestic job cuts, the reality is that jobs are not being cut but rather transformed. Contrary to public fears over domestic job cuts, offshore outsourcing will actually have a positive affect on U.S jobs. Just as America transitioned from a labor intensive economy to a capital intensive economy in the 20th century, the American workforce will evolve to an intellectual capital intensive economy in the 21st century. Traditional IT roles will expand, requiring broader leadership skills: international project management, personnel management, business development, all with a high degree of problem solving and innovation. No matter how big or small, Companies with a global perspective are most likely to win.
…and Good for Global Economic Democracy
And let’s not understate the positive impact of IT job creation in the developing world. While many underestimated the ability of many developing countries to manage global business, they overlooked the fact that the new global IT economy is built on people, not governments or infrastructure – something U.S businesses never lost sight of. The double-digit growth of the offshore IT workforce reminds us the how resilient and resourceful people really are. While governments in the developing world have come and gone, people - not institutions- are adapting to the demands of globalization to survive, prosper and excel. In the process, they are reversing the traditional model of national prosperity. Recognizing themselves as international assets, a growing number of offshore workers will rely less on shaky governments and institutions by becoming stakeholders in their own prosperity. Plus, many of these offshore vendors have their headquarters in the U.S. and send U.S. educated managers to overlook their development centers—covering all bases.
Keeping Up with Regional Arbitrage
The laws of supply and demand which created the global demand for lower cost offshore skilled workers remain continuous. While outsourcing has grown for good reason (a top software programmer in India costs 50-60% less than the equivalent in the U.S.), the pressure from wage inflation is opening new markets in the region. Salaries for Indian graduates, engineers and programmers have been climbing fast and staff turnover for IT companies can reach 30-40% a year. Pakistan, for example is outsourcing a swelling number of English speaking software developers at roughly one of the comparable American wage. When a country like India loses its monopoly on offshore outsourcing, the potential of lower costs and greater quality in other nations swells.
As global demand grows faster than supply, lower skill business processing tasks which don’t require innovation or customer interaction, like application processing, are moving from India to China, which can organize millions of low-cost workers to execute these rules based, repetitive tasks. The latest lot of companies expanding to take advantage of regional arbitrage are the very Indian firms that make their money from outsourcing services. Tata Consulting Services (TCS), Infosys and Wipro all have a footprint in China and plan to expand their workforce into the thousands over the next few years. So when outsourcing to these huge firms companies will potentially be outsourcing to an offshore outsourcing firm which outsources to smaller boutiques located throughout various parts of the world! That may be a little too global for some.
Looking Ahead: IT Gets Lean and Mean
As offshore outsourcing becomes the next business essential, several changes will take effect in the U.S, beginning with the emergence of smaller offshore IT management companies in the U.S. offering fast, flexible, transparent business solutions without the bureaucratic, bottlenecked project workflows of the big firms. The clarity of value from smaller, personalized shops will be compelling not only for small and mid-sized businesses but also for big corporations, who will increasingly rely on the nimble, personalized approach of small offshore IT firms to accelerate delivery in the highly compartmentalized environment of competing business units and firewalls. The personalized attention that comes from the smaller firms based out of the U.S. will also be compelling and highly effective with issues of research, product development, and management. Project leaders and innovators will value the transparency and flexibility afforded by smaller firms which will enable them to react to changes in business needs quickly.
There are other advantages of being small. Smaller IT firms will be much faster at adapting to new technologies, training staff, and in recognizing talent and spotting defects. A smaller workforce means employers can invest more time into employee development, which leads to greater productivity and efficiency. These firms are more likely to deal with the risks involved in staffing based on client demand. Because they want to have a strong foothold in the industry, the little guys will be more likely to keep up with the latest trends and staff accordingly. Smaller firms, in other words, will offer better quality.
Looking Ahead: The Next Big Opportunity for Smaller Firms
While the bulk of offshore outsourcing has been for large-scale driven IT functions, the emergence of demand for more innovation based products and services is creating even more opportunities for small IT businesses. Because of the surge of “Web 2.0” products and applications for example; smaller IT firms aren’t afraid to have their financial analysts and .Net engineers sharing workspace with let’s say- AJAX and Ruby on Rails programmers. Because they will be lesser known than the gigantic outsourcing companies, the smaller firms make their presence recognized through the quality and choice of projects. They differentiate themselves by showing they can offer forward thinking and quality services with regards to the latest technology trends. Proprietary gaming software is one other latest interactive trend business are aggressively pursuing. Its application will range anywhere from dynamic advertising and customer service, to highly sophisticated customized games. It won’t be unlikely for a state of the art game to be created from conception to execution by a small IT firm with its engineering staff based in a country like Pakistan—and it will be done for a fraction of the cost!