Far-reaching boom: offshore outsourcing
In early 1998, David Grossman, an analyst with Nationsbanc Montgomery Securities, told investors the booming U.S. economy had a shortage of computer scientists and he perceived significant opportunities for companies to provide software development services using engineers offshore.
Bank of America capitalized on its analyst's words - 4 1/2 years later. Last month, the bank announced it had entered into an agreement with three firms to provide application development and maintenance services to the bank's internal IT groups.
But wait. The U.S. economy is not booming, there's an abundance of highly skilled computer programmers out job hunting and IT budgets are squeezed. In short, this is not Grossman's 1998.
Yet demand is surging for outsourced IT services in India, the Philippines, China and other locations.
"When the economy is good, things are good for us. When the economy is bad, things are better for us," says Atul Vashistha, CEO of NeoIT, a San Ramon consulting firm that has helped companies such as Procter & Gamble Co., Cardinal Health Inc., Agilent Technologies Inc. and BellSouth Corp. move operations overseas. Merrill Lynch last month called NeoIT "the most aggressive outsourcing consultant," ahead of McKinsey and Gartner Consulting.
Bank of America hired Accenture and India-based Tata Consultancy Services and Infosys Technologies Ltd., a firm from Bangalore, India, whose U.S. headquarters is in Fremont. Infosys has worked with Bank of America in the past, so the announcement was merely a continuation of that relationship. More significant for Infosys was the addition of 18 clients in the last quarter. The company reported a 32 percent increase in revenue last quarter.
"In a down economy outsourcing per se does do relatively better than consulting or systems integration," said Basab Pradhan, head of worldwide sales for Infosys. While companies are not taking on new IT projects or buying new systems, they are looking to operate more efficiently through outsourcing, he explained.
Offshore outsourcing of costly IT and back office services is particularly appealing to financial services firms - a fact that could have implications for the East Bay, where many back office operations are based. Already, one Novato mortgage firm is moving some operations to India.
When analyst Grossman told his investor friends about offshore IT work, he and others were thinking, in part, about the Y2K scare and the massive amount of computer upgrading and reprogramming that companies were doing to avert a millennium rollover disaster. But companies didn't just need extra IT brains for Y2K-related projects. The boom in technology and Internet spending from the late 1990s through 2000 fueled a shortage of computer scientists of biblical proportions. And the shortage seemed worse because the corporate mantra of the era was to move fast, to embrace change and to push your engineers to launch new software, new Web sites or new companies before a competitor or soon after them.
This corporate culture of fast companies meant companies looked to outsource IT activities primarily to get more engineers for their money and to complete projects quickly.
Today, the rush to complete IT projects - whatever the cost - has all but gone bust. Instead, budgets are frozen or shrinking and IT departments are looking at ways to operate more efficiently by shifting ongoing work overseas.
The Burlington Northern and Santa Fe Railway Co. faced a problem in 2001 typical of many companies after the Internet bubble popped: a shrinking IT budget without a corresponding decline in IT needs. The rail company partnered with Infosys to outsource some of its computer programming and maintenance work. Along with maintenance of computer systems, Infosys has helped upgrade the company's databases and its Web-based application development capabilities. BNSF reduced its IT budget by more than 20 percent in the first year, according to the research firm Aberdeen Group Inc.
Lehman Brothers is negotiating a multiyear, multimillion-dollar outsourcing project in India, and AT&T Wireless hired Tata Consultancy Services in September to set up a global development center in India to supplement its own internal and customer support systems.
Although considered mainly the domain of large companies that can unload significant portions of their IT staff, offshore outsourcing can touch smaller firms as well.
Knowledge Transfer Systems, an Oakland developer of online training products, is realizing the benefits of relying on Indian developers. In September, the company, whose stock trades on over-the-counter bulletin boards, expanded its partnership with Mumbai-based Gurukulonline Inc., a developer of online learning courses. Knowledge Transfer Systems said the deal cuts its development costs for courses and expands its production capacity.
A software developer can cost $120,000 to $140,000 in California, while a company can hire one in Bangalore for $45,000 to $55,000, Vashistha said.
While many companies have been saving on software development costs, others are moving on to bigger opportunities and savings by moving business processes offshore.
"Companies are making significant moves today to lower their costs of doing business. Two years ago, they were trying to lower the cost of a project," said NeoIT's Vashistha.
The big deal today is business process outsourcing, while two years ago the hot spot was primarily project outsourcing. Call centers are considered a prime candidate to relocate overseas. Procter & Gamble and AOL, for example, have call centers in the Philippines.
"The cost implications are very, very big," Vashistha said, explaining that companies can cut their costs in half and improve service by putting a call center in India.
The shift from offshore project development to relocating business processes, such as back office operations and call centers, means contracts being awarded are much larger today. Vashistha said today the industry is talking about multiyear, $100 million deals.
NeoIT advised corporations on outsourcing projects in India worth $225 million in the past year and has another $500 million worth of projects in the pipeline.
Infosys and competitor Wipro Ltd. have each invested in business process outsourcing subsidiaries. In April Infosys launched Progeon Ltd., and Wipro in September acquired the entire equity holding that was owned by American Express Travel Related Services Co. Inc.'s stake in Spectramind eServices Private Ltd., which provides business process operations in India.
Novato-based GreenPoint Mortgage, the nation's sixth largest wholesale mortgage lender, signed a deal this summer with Progeon to provide mortgage back office functions. Progeon, building on an existing Infosys relationship with the mortgage firm, established an operations center for GreenPoint in Bangalore to lower costs and increase the efficiency of loan processing.
Pradhan said 35 percent of Infosys' revenue comes from financial services clients. The next largest segments are retail and manufacturing, he said.
And can the offshore outsourcing boom continue? Most say yes. Anyone who doubts the prospects for the business need look no further than Infosys. In anticipation of continued growth the company last quarter hired 1,800 people.