Execs Claim Outsourcing Wave Is Unstoppable

The offshore outsourcing phenomenon that's hitting the IT industry is unstoppable.

That was the message from some industry executives and leaders on Wednesday at Technology Review's Emerging Technologies Conference at M.I.T., in Cambridge, Mass.

Sudhakar Shenoy, chairman and CEO of Reston, Va.-based IMC, which does offshore programming, said his company recently built a sophisticated program used by pharmaceutical companies that cost $400,000 to create in India, whereas it would have cost $3 million if developed in the United States. At the same time, the 17-Tbyte database product resulted in the hiring of 12 highly paid U.S. scientists, who are helping to market the product in the United States.

IMC also did a 200-course online software development project for an East Coast university, which Shenoy declined to name, for $50,000 per course, as opposed the next lowest bid of $140,000 per course. At first, university officials were skeptical of the potential quality of the work because of the low bid, Shenoy said. But IMC provided the first course to the university with the agreement that it wouldn't have to pay for it if they were dissatisfied. Now IMC is doing development for a number of universities, he added.

"This whole issue of outsourcing is a natural phenomenon," Shenoy said. "It happened in the 1970s with manufacturing jobs." Outsourcing is an example of America's desire to get "the best product at the lowest price," he added.

That said, Shenoy noted that outsourcing in India is an $8 billion market, compared to a $10 trillion U.S. economy. "The whole idea of outsourcing is good for consumers. It's good for all of us," he said.

Shenoy criticized CNN commentator Lou Dobbs, who has railed against U.S. companies that outsource, for creating hysteria around the outsourcing issue. Instead, Shenoy urged U.S. integrators and VARs to embrace outsourcing and build partnerships with offshore firms.

Ron Hira, an assistant professor of public policy at the Rochester Institute of Technology, said U.S. services firms must adapt to the offshore outsourcing model or "they are going to get beat on a lot of these contracts." The alternative is to "move to other niche areas or areas where there needs to be a lot of on-site components," he said.

"It is very much a cost-driven thing right now, unless [U.S. services companies] can create some product differentiation," Hira said.

With a technological lull and no killer app on the horizon, Hira noted that as much as 80 percent of a services company's cost is labor. "What are you going to do?" he asked.

Large Indian integrators such as InfoSys and Wipro are making 29 percent profit margins, compared with 3.5 percent margins for U.S. IT services giants like EDS, Hira said. That has prompted companies like EDS to lay off thousands of workers in the United States and move those jobs to India, he said.

As a result, Hira said, there is no way companies like EDS and Computer Sciences Corp. (CSC) can compete unless they adapt to the outsourcing trend. The offshore companies also enjoy better tax rates. For example, Hira said, the effective five-year average tax rate for Satyam, an Indian IT services giant, is 14 percent, compared with 31 percent for U.S. IT services provider Cognizant.

Cost advantages have led to dramatic market capitalizations for Indian IT services companies, Hira said. For instance, InfoSys has a market cap of $12.1 billion versus $8.6 billion for EDS, even though EDS has much greater annual sales, he said.

There is no point in "vilifying anyone" in the outsourcing debate, Hira said. "If you are EDS, what choice do you have?" he asked. But at the same time, U.S. IT workers are anxious about the possibility of being laid off, Hira said.

Sophie Vandebroek, vice president and chief engineer at Xerox, said her company's strategy has been to maintain the core development of its crown-jewel technology and to outsource selectively--mostly related to what she called "sustaining engineering."

As a closing to her comments, Vandebroek showed the Chinese symbol that signifies both crisis and opportunity. "In any moment of change, there is danger, and people are getting paranoid and scared," she said, noting that outsourcing is a great opportunity.

Article originally appeared in CRN, September 29, 2004