Today India is the heart of offshore IT outsourcing, claiming at least 80% of the world's business. But, even if India can maintain such a huge share of a fast-growing market, which experts doubt, some companies are looking at alternative destinations. Three-quarters of the top 1,000 companies in Europe will evaluate offshore IT services over the next couple of years, predicts Ian Marriott, a research director at analyst firm Gartner.
Offshore outsourcing deals are often shrouded in secrecy, making it difficult to pinpoint how many companies are dabbling today. Estimates put involvement at less than 50% in the UK, considerably more in North America and significantly less in Europe. That might sound like a large number, but to be included in the count companies only need to have outsourced the smallest project - such as Y2K date-change work. Often so-called "offshore" work is actually done on-site by a local subsidiary of an overseas company.
"It is early days," points out Bob Aylott, principal consultant at outsourcing specialist Orbys Consulting. He estimates that somewhere between 2% and 5% of UK IT development is outsourced overseas, compared to as much as 25% in the US.
Figures from the Indian High Commission in London concur with this opinion. India's software and services exports were worth about $8bn (£5.4m) in 2000-2001 which, the High Commission points out, is less than 1% of the world's total outsourcing expenditure.
UK companies that admit publicly to outsourcing abroad include British Airways, British Telecom, United Utilities, and Lattice group.
Over 10 years, John Lockett, chief information officer with gas utility Transco, has used three Indian companies for IT development work. However, while he is impressed by the track record, quality and value for money in India, he is "always on the look-out for the best place" when it comes to future projects.
And there is a bewildering array of destinations to choose from across Asia, Europe, South Africa and South America, each with its own merits and drawbacks. Favourites for a UK IT director's short list may include India, Russia, South Africa, Eastern Europe and, if planning farther ahead, China. No country can be written off, but these are perceived to have a slight edge over others.
There is a slight cost advantage for Ireland, Northern Ireland and Israel. Other destinations are more interested in the US market or are seen as physically too far from the UK - such as the Philippines, Singapore and Mexico. Others, like Pakistan, have yet to make it on to the radar, according to Orbys. The consensus is that you should pick the country first, then choose a partner
Where to go for help and advice
- For British embassies abroad: www2.tagish.co.uk/links/embassy1b.nsf
- Intellectuk.org has an offshore group
- Consultants such as Orbys Consulting: [email protected]
- Specialist legal firms like lawyers Shaw Pittman: www.shawpittman.com.
When choosing a location, remember
- Costs of labour, hardware, and software
- Long-term availability of skilled labour - worry about the brain-drain in South Africa or demand in pushing up prices
- Communications infrastructure - both physical and virtual
- Government support - few countries can match any export/import/tax/grants advantages enjoyed by Indian firms
- Physical security - will your staff and servers be safe?
- Virtual security - check on intellectual property legislation and enforcement
- Political stability - the flare-up in the conflict between India and Pakistan raised a few eyebrows.
Exercise due diligence when choosing an outsourcing partner
- Consult the trade associations and the local consul
- Check references
- Visit the company - inspect the facilities and previous project work
- Check physical security, insurance, employee non-disclosure agreements, etc
- Thrash out the contract terms - hourly rates or fixed-price?
- Does the outsourcer have a UK office, representative or partner? Will any liaisons have to re-locate?
- Certification - consider ISO standards, capability maturity model, specific supplier qualifications
- Assess the impact of worker/public relations when the news gets out.
Case study: China plays a long game
There is little evidence of companies outsourcing to China, but most experts believe it will be a big player. In fact, according to the Indian High Commission in London, China is the "most obvious" competitor for India in the future.
The People's Republic has a huge pool of cheap skilled labour, but there are barriers to wider acceptance by UK business. The biggest issue, according to Jennifer Mattingly of law firm Shaw Pittman, is that China "lacks rigid enforcement of intellectual property rights," sparking the fear that a company could struggle to protect the ownership of its code. The Chinese government is said to be addressing these issues.
National Grid considered China, before outsourcing an IT project to India. Ranjan Mohanty, project manager, outsourcing, says the price was better in China, but felt that the engineers were too internally focused and did not have sufficient command of English.
Case study: India moves to quality
Estimates for India's share of the offshore market vary from 80% to 90%. The largest companies have bases distributed across the globe, thousands of employees and prestigious customer lists. The Indian government has encouraged IT growth with liberal laws and tax rules, making it easier to import software and hardware for IT projects and to export the results.
India has a vast English-speaking technical workforce available at a fraction of Western costs, but increasingly seeks to move the debate from cost to quality in the face of low-cost competition.
With success, comes the fear that demand might eventually push up costs. India also loses points on geographical and time zone difference from the UK and there are cultural differences. The escalation in tension with Pakistan caused concern among customers.
- Software and services exports: $8bn in 2000/2001
- About 10% of this business is with UK companies, including British Airways and British Telecom
- Services available: helpdesk services; network and security management services to highly customised development; system integration and maintenance work
- Suppliers: 2,500 firms, 200 with UK offices, the big ones include Tata Consultancy Services ( www.tcs.com/), Infosys ( www.infy.com/) and Wipro ( www.wipro.com)
- Cost savings: 40% of the cost of the same project in the UK (source: Synapse; www.synapse.co.in/)
- Contacts: National Association of Software and Service Companies ( http://www.nasscom.org/), Electronics and Computer Software Export Promotion Council.
Case study: Central and Eastern Europe meeting internal demand
The Czech Republic, Hungary and Poland enjoy closer proximity in geography, time zone and culture to Western Europe than their competitors. According to Gartner, this has helped them to win contracts with several big German companies.
Central and East European countries do not intend to compete long-term with Russia, India and China on price. Nor do they have a huge supply of software engineers like Russia, so even if prices seem low today, domestic demand - particularly in Poland - as well as demand from near neighbours could quickly mop up the resources and force prices up.
The communications infrastructure is fairly good. However the government is more focused on joining the European Union than building the IT business.
- Exports of software and services: Poland - less than c130m (£84m) and considerably less if multinational exports were excluded (source: Polish Chamber of IT and Telecommunications); Hungary - c220m-c240m; no figures for the Czech Republic
- Services: network; Web site database management; data storage; e-mail and systems maintenance
- Cost savings: 30% to 50%; hourly rates range from $40 to $150 per hour (source: Unicorn)
- Contacts: Polish Chamber of IT and Telecommunications ( www.piit.org.pl/, [email protected]); www.czech invest.org/; www.unicorn.cz/en; and www.arcorn.com/ , [email protected]
Case study: Russia - still a small fish in a big pond
Rates quoted by Russian firms are comparable to, and some times cheaper than, those in India and it can also boast a vast IT-skilled workforce. Both in terms of geography, time zone and culture, some argue Russia is closer to the UK than Asian countries so it is not surprising that it is treated as a future competitor for Indian business. However, as analysts at Gartner point out, Russia's entire offshore exports only match the revenue of the sixth largest Indian company.
Russian skills focus on open systems skills rather than mainframe, and they claim to be better at complex problem-solving and project specification. Intel, Motorola, and Boeing all have subsidiaries in Russia and there are several UK company names on the reference lists of outsourcing companies, but Russia's thousands of small firms still look like a cottage industry in comparison to India's monoliths, according to Jennifer Mattingly, a specialist outsourcing lawyer at Shaw Pittman.
A proliferation of IT skills is not matched by English language skills, so technical helpdesks are not a good option. Potential customers sometimes express concerns that intellectual property rights are not rigorously enforced or that IT hardware itself may be stolen.
The Russian Government is not pro-active in helping the local talent. Companies admit that bureaucracy is an issue and some have been hit by heavy customs levies on software shipped over by the client.
- Size of offshore business: $213m in 2001 (source: Russian Software Development Association) growing at 50% per year
- Most business goes to US customers: 10%-30% goes to the UK. UK customers include water companies and mobile phone networks
- Services: coding; development and maintenance; problem-solving and "agile programming"
- Cost savings: 30% to 50% (source: Fort-Ross)
- Hourly rates: $10 per hour from the small shops; $20-$35 per hour in St Petersburg; $30-$50 per hour in Moscow (source: Jensen Technologies, www.jensentechnologies.com/)
- Bigger suppliers: Digital Design ( www.digdes.com/); Luxoft ( www.luxoft.com/); Epam Systems ( www.epam.com/); Novosoft ( www.novosoft-us.com)
- IT communities and consortia: www.fort-ross.ru/; National Software Development Association ( www.nsda.net/); www.russoft.org/
- For UK-based expert on Russian outsourcing: Tidal Programming ([email protected]).
Case study: Right climate in South Africa
South Africa enjoys a similar time zone, culture, language, legal and tax framework to the UK. However, it is 12 hours away by plane. And while much of South Africa is a beautiful backdrop for a business trip, a high crime rate means that caution is required in certain areas. The IT industry is well established. The weak Rand makes cheap skills seem even cheaper to overseas companies, but many IT workers are considering emigration. IDC believes that South Africa faces its own skills crisis.
Official numbers are not available. Estimates (unless specified) are from Raven Naidoo, director of Tellumat and executive chairman of IT consulting firm Radian Technologies ([email protected]).
- More than 1,000 companies service an IT outsourcing business that is worth $3bn-$6bn. More than 90% of the customers are South African
- Services: software development; project management; Internet-based and call-centre-based helpdesk
- Typical cost: for high-level programmer/project manager $15-$35 per hour; for helpdesk $3-$5 per hour
- Annual salaries: for programmer $13,000; for project manager $23,000. This makes South Africa 30%-50% cheaper than the UK (source: Gartner)
- For help: the Western Cape Investment and Trade Promotion Agency ([email protected]); Cape IT Initiative ([email protected]).