Outsourcing: the Hoopla, the Reality

Outsourcing IT to foreign countries is a big and emotional topic for a lot of people (especially in the United States), with career IT professionals now living in fear that their jobs will go to bright-eyed and bushy-tailed southeast Asians. Recent budget reports of several companies, however, seem to contradict the fears. Is it possible that the fear of outsourcing is at best exaggerated and at worst an outright lie?

Consider the following numbers:

According to a SIMNET survey (Society for Information Management) of 130 top IT executives and CIOs, it was shown that 60 percent of these companies said that less than ten percent of their budgets was for any kind of outsourcing, and 73 percent said zero percent of their budgets were allocated for off shore outsourcing. SIMNET conducts these studies yearly and according to their yearly reports, offshore outsourcing allocations in IT budgets has fallen from 4.23 percent to 1.1 percent.

Dissonance

This brings a sort of "dissonance" to the media hype surrounding both off-shoring and outsourcing, but numbers don’t lie. So how do companies fill their IT needs? It seems all the bushy-tailed, eager beaver types are not in the corner office improving up-time and solving open source support needs (it seems that’s another fallacy). IT company Lab49 disagrees, claiming that companies can solve their IT problems by training and equipping their current staff for high quality tasks.

John Soat over at Informationweek.com believes that this dissonance needs to be studied more deeply to understand it. The hype does not seem to be supported by the direction in which budget money is going. He proposes that there be a conference call with participants from different survey groups, CIOs and CEOs who are in the business (I keep wondering about that. Will they all like each other? That’s a joke by the way).

I prefer a more inductive approach. First reach a conclusion, then go back to look for reasons. In the field I work in I’ve discovered that companies do not enjoy outsourcing, mostly due to security reasons and employee loyalty. It is actually more cost effective in the long term to train your staff to solve problems unique to your organization, and also to buy enterprise editions of software, so that you can get support from the source instead of betting on risky software with no guarantee of support.

Basically, IT outsourcing is peaking. The reports are pouring in about General Electric selling their entire Indian operation for (gasp) one billion dollars. And for a simple reason: the pay scales are getting higher, the comparative wages are making US (or local if you are not in the US) IT support more costly, and you get the nearness factor to boot without the hassle of cultural differences. CIOs and CEOs have noticed these trends and are responding; the press as usual plays catch up.

{mospagebreak title=Why the Pay Raises?}

This is basic economics. The assumptions seem to be based on the fact that several billion people translate to a corresponding number of IT-savvy professionals willing to work, but this is not necessarily true. There is a finite supply of skilled labor in any geographical area and this is making the economics of outsourcing change. The highly skilled individuals found in southeast Asian countries were in big demand as more multinationals flocked in and as local businesses grew. All were willing to pay the going rate to hire IT staff and support. And when demand exceeds supply, the prices go up. It has not helped that the rupee is getting stronger (or is it that the dollar is getting weaker?).

Suddenly it has been discovered that bushy-tailed, eager beaver types actually reside in the United States —  what a surprise! — and very quietly, the outsourcing trend is rapidly reversing, so you can stop bemoaning your fate and get on with your jobs. The outsourcing pundits claim that China and Russia will pick up the slack and keep prices down. How do I say "we don’t speak English" in Chinese (or Russian)? And if they do speak English, it soon becomes obvious that English is a second language. Indians speak English pretty well. That was one of the primary reasons why the multinationals flocked to India. I don’t think anyone will be putting IT support (or call centers) in China anytime soon. Ehhh, I won’t go into details of why not.

For anybody thinking that this is great news for IT professionals or for the managers that work with them — not exactly. There are other factors that will ensure that prices paid to IT professionals in the United States will not rise and that job security is a contradiction of terms. Outsourcing is just one of them. IT support becoming a commodity will not help long term job security. Neither will the auction down bidding model, where the lowest bidder wins, for building generic platforms. Still, programmers and server and DB admins can now rest easier in knowing that they are once again in demand (in some fashion). In other words, quit the xenophobia; the Indians are not taking your jobs! The competition is definitely out there, but it’s not as gloomy as some pundits claim it is.

So how do you react to the sudden relevance of local IT support? In a variety of ways; the more general and the better at current trends an IT analyst is, the better.  Mastering XML RPC and SOAP, open source database support as well as Windows databases and software will help. These teach you skills in using multiple programming languages to build GUIs and back ends, which will keep you relevant and let you pursue an aggressive bidding strategy. And as an IT manager, how do you recruit and manage effectively as you once again come face to face with your IT staff? That, I believe, is a question we will be asking for some time, since there is no clear answer.

"As a generalisation it would be hard to save money, and maintain excellent service, in a well-run service"

– Richard Steel, CIO, London Borough of Newham

{mospagebreak title=The Money Myth}

Most outsourcing is done to "save money." Basically it is "assumed" that if a company wants to cut IT dollars, it should strip down its internal unit and send all its heavy stuff (apart from PC maintenance) to Bangalore, or Poland, or Buenos Aires. According to an article by Cio jury, this is true in some cases, but is not necessarily true ALL the time. 

Those promised money savings may never materialize and may even add to the bottom line. And if it does reduce cost, it may negatively affect the quality of service a company offers. Let’s give an example where a company’s enterprise software programming is shipped to some IT capital. Nobody is exactly sure about quality control or quality assurance. Testing takes time and when faced with a deadline, some programmer is going to build and test the whole thing in assembly line fashion. Granted, this is a broad generalization, but I have seen it happen. It gets back to the customer and the back end is working, but… what’s with the GUI? Some buttons don’t work and the software doesn’t do anything without giving you an error message. 

You plunked down a fifth of the amount you would spend on a programmer in the United States, but now you have a program that needs fixing. And there is no money back guarantee if you are unhappy. To use common parlance, "you are stuck with it." You use the rest of your IT budget to bring in some local IT firm or rehire a programmer on a contract basis, pay some more money to have the program fixed (another man’s code, only God knows if the code is well commented), and you may even have to start from scratch — thus giving you one package for twice the money.

Lest you think I am exaggerating, look around at people who have sworn off outsourcing. Most of them were burned by bum jobs and found out that they had no legal recourse. Countries have different laws and if you don’t understand or have a relationship with the company to which you are outsourcing, it becomes a bit of a problem when it comes to support and trouble shooting. Several of these companies are great to work with, but you cannot be sure unless you have referrals and a knowledge of their work ethos (their work ethic is already spoken for). The problem is that when you are shopping for price savings, quality always suffers (Wal-mart sneakers anyone?).

One organization that has cut costs through outsourcing is Vocalink. Nick Masterson-Jones, IT director at Vocalink, said "We have focused on outsourcing work packages to trusted partners and we have achieved significant cost-savings by doing so. By retaining accountability in-house and by keeping the scope of the packages tightly controlled, we have managed to avoid some of the pitfalls that make the front pages of the computer press."

{mospagebreak title=Full Disclosure}

Lest any one think I am a rabid xenophobe intent on destroying the outsourcing market, I am a Nigerian who has directly profited from jobs being shipped from all over the world. I have worked with people from the Philippines to California. 

When I got to the United States, the quality of service was extremely high. The prices were also sufficiently high enough to continue shipping all contract work I get overseas, with savings of close to or over 20 percent.

That said, out sourcing can save money, but not forever. And in a truly global economy, it will get IT work done at the same quality at rock bottom prices.

The mantra that outsourcing saves money is still trumpeted. This is good for Bangalore, Prague, Buenos Aires, and even for me! I got my first tech job while sitting in front of a computer in Nigeria, and my second … and my third. Web design, programming, tech writing, even SEO services fled the shores of the first world and landed on my door step.

In truth, I did (hopefully) save the companies I worked for — and some that I still work for, including this one — money. So I am definitely not saying outsourcing should stop. I am just saying it should not be taken for granted. It should definitely not be taken for granted that it will save a company time, money and headaches. As with any other business, you get what you pay for.

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