Outsourcing to India or a low cost US location ?
SOURCE: MercuryNews
DATE: March 3rd, 2009
Mohit Soapbox:
The companies trying to deal with the downturn and reduce cost continue to look at cost factor as the primary driver for outsourcing. The talk about better quality, process improvement currently are not buzzwords being used by vendors or factors driving corporates to outsource. It has come down to the basics so inspite of what you hear from analyst or vendors, outsourcing decision today are only about cost. Yes process improvement, higher quality are all good to have but not factors for decision making when it comes to doing outsourcing or retaining outsourcing. This is also the reason why a number of the corporates are going back to the vendors asking them to reduce cost.
The recent statements by Obama adminstration has created a cautionary re look for firms looking at outsourcing but in our observation, has not slowed down or changed any decision making thought process. We do see a viability of leveraging locations within the US for some work and firms with large scale or small scale can benefit from creating a true global model. We believe that a number of firms have asked their offshore vendors to build a global footprint and strategy which is not workable in the long run. Offshore vendors, even the large ones like TCS, Infosys are good in operating models in their local footprint and have struggled to expand their footprint globally and execute.
There are a number of factors which have increased the need to to better risk due diligence and on going compliance required to work with offshore vendors including the recent terror attacks, Satyam fiasco. So that has added to firms extending their outsourcing decisions.
The politicization of corporates has muddied the water and has added the risk of a political /media scapegoat risk for firms who are looked upon as sending jobs offshore as anti national. Firms today do have to take that added risk in account when making outsourcing decision.
There is though a social factor of corporate responsibility in creating and preserving jobs in a down economy like what we are going through and that factor is critical too in decision making today. Not because it is a political issue but it is a social issue. It gets back to core question about are corporate purely to make profits and be there for their shareholders or have a social responsibility for which they should be willing to sacrifice their profits. The fact that a number of these corporates have gotten money from the government aka taxpayers makes this issue more complicated.
A recent analysis we are doing for a client of ours takes into account a number of these factors and the new ones in decision making whether to outsource to a low cost location or relocate to another lower cost location in the US. The tough thing with an analysis like that is that it is never black and white and inspite of all the wonderful spreadsheets we can come up with it is a subjective decision. CEOs, CFOs, CIOs and Globalization Program Management Offices today are in a non-enviable situation and any decision they make in regards to outsourcing or not outsourcing will always be questioned.
Corrystone Global Partners is an outsourcing consulting firm providing benchmarking, operational risk compliance, operational audit and transition management services to companies with operations in US and India. We work with firms which are exploring India or low cost US locations for IT, Business Process work and or have established IT/operations in India and US and are looking at ways to further optimize cost and manage operational risk.
The global economic crisis, as well as pressure from the Obama administration to keep jobs at home, may be causing some tech executives to rethink their outsourcing strategies.
A new survey of chief financial officers suggests these perilous times are causing some to consider outsourcing operations to other regions of the United States rather than overseas. While there is no evidence of a major shift in outsourcing — and while some experts think the bad economy will actually accelerate the movement of U.S. jobs to developing countries — the recession clearly has caused corporations to reassess their global strategies.
Twenty-two percent of the respondents said they were more likely to consider the United States for new outsourcing work than foreign countries, according to the BDO Seidman 2009 Technology Outlook Survey taken in January and released on Tuesday. The report tallied responses from 100 chief financial officers at hardware, software, telecommunications and Internet companies nationwide.
About a third of those polled said difficult international economic and political climates have lessened their appetite for overseas outsourcing. A fourth of those polled are concerned about international business and tax regulations, and 14 percent worry about intellectual property risk.
“My gut tells me this is just a reaction to the current economic environment,” said Douglas Sirotta, a San Jose-based partner in the technology practice of BDO Seidman, a national consulting company.
Executives, though, are also concerned about the Obama administration’s stance on outsourcing. During his address to Congress last week, President Barack Obama said, “We will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas.”
Concern overseas
Such statements unnerve companies across the globe, said Rafiq Dossani, a research scholar at Stanford University’s Asia-Pacific Research Center.
“Indian companies are very worried about this,” he said. “They’ve been trying to figure out whether it will effect their business. If Obama’s statement becomes a law, there will be some impact. Some companies here will say, ‘We can’t take chances.’ There’s so much uncertainty.”
The survey did not specifically ask executives whether events such as the recent Mumbai terror attacks or fears about the Obama administration’s more restrictive views on outsourcing discouraged them from shipping work overseas. But Sirotta believes the current economic turmoil has added to the usual headaches associated with looking for low-cost help in countries like India and China.
India, he said, “tends to put a lot of restrictions on doing business in that country. China is getting much more sophisticated with its regulations and tax requirements.”
While numerous companies abroad that offer outsourcing services to American companies are seeing a rapid drop in business, experts attribute much of the decline in orders to the contracting U.S. economy.
“Many “… (American companies) are packing their bags and heading for home,” said Steve Cook, a former Silicon Valley executive who is now chairman of Enclave, a software development company in Da Nang, Vietnam. “Those who are remaining are looking for savings, demanding rate relief.”
Still, he thinks outsourcing within the United States will be nothing more than a “niche” industry.
“It will appeal to some,” Cook said. “There will be some U.S. clients who will find cost savings and who will feel comfortable with staying domestic. Outsourcing is a vice in many a mind.”
‘Wishful thinking’
But Vivek Wadhwa, a researcher who studies the role of immigrants in America’s economy at Duke and Harvard universities, said any expectations about a decline in overseas outsourcing are “wishful thinking.”
“Companies are desperate to reduce costs,” he said. “They are going to India and China in droves.”
Vamsee Tirukkala, co-founder of Zinnov, a Silicon Valley outsourcing firm, said no more than 2 percent of his clients have asked about expanding operations to other regions in the United States.
“This economy has pushed more and more conversations in the boardrooms about how to optimize costs,” Tirukkala said. “Any companies that are closing down offshore operations are companies that are actually closing down their business.”
Sirotta said it would be difficult for regions of the United States to compete for a lot of outsourcing work because other countries offer powerful incentives to multinationals and have large numbers of skilled and low-cost workers.
“Some of these countries, like India, have done a very good job of creating a really good skilled labor force,” he said. “They are very motivated.”
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