These days, one is more likely to hear a politician or corporate executive use the term “offshore” than a sailor. That’s because offshore outsourcing and the more general offshoring have become common and controversial business practices — especially when it comes to information technology.
First, the controversial part: When you hear politicians griping about companies shipping jobs overseas, they are talking about offshoring.
Simply defined, offshoring is the practice of relocating certain aspects of a business to foreign countries primarily to take advantage of lower-priced skilled labor. This can involve manufacturing or services. Plus, it comes in many forms, including one where parent companies sets up an offshore operation.
Offshore outsourcing, a practice more common to IT, involves shipping certain business operations or processes to third-party providers that utilize overseas locations. This can involve multinational service providers such as IBM, Unisys and EDS, which is scheduled to become part of Hewlett-Packard this year. Or it can involve foreign companies, such as India’s Tata Consultancy Services, Wipro Technologies, Infosys, Cognizant and HCL Technologies.
You’re more likely to hear candidates talk about offshore outsourcing than business leaders.
“It’s still a very popular business practice nowadays,” says Benjamin Shao, associate professor of Information Systems at Arizona State University’s W.P. Carey School of Business. “But I think U.S. companies now have learned from their own experience or from their competitors’ experience over the last few years. So now they also try to be a little bit more discreet and careful when it comes down to the idea of offshore outsourcing.”
TechsUnite.org, a high-tech workers union site, claims 528,478 U.S. jobs have been offshored since Jan. 1, 2000 through early August of this year.
The main reason for offshoring, according to Shao, is cost reduction, which may equate to a savings in salaries alone that ranges from 30 percent to 50 percent. Other considerations include incentives from foreign governments and access to highly skilled technical employees in such countries as India, China and Malaysia. Also, the move overseas has been facilitated by advances in technology.
“It makes it easier now for companies to manage an IT project on the global scale, which was not possible before the Internet era,” Shao says.
Ross Tisnovsky is vice president of ITO research for the Everest Research Institute, a subsidiary of the Everest Group. The global consultancy organization serves a number of Fortune 500-level buyers of outsourcing services, including several with interests in Arizona.
He separates IT outsourcing into three main categories: infrastructure outsourcing, application development and maintenance outsourcing, and IT consulting. The first deals with running such operations as servers, networks, etc. The second includes writing code for new applications and maintaining code for existing applications. The third ranges from setting up data centers to consulting on infrastructure.
IT offshoring offers two choices.
“I would loosely break down offshoring into two components,” Tisnovsky says. “One, you outsource to an external supplier that has major operations offshore. And then, if you go with a multinational supplier … then you are likely to get a lower percentage of your resources offshore. But if you go with an offshore supplier … then you will get a much larger percentage of your work force located offshore.”
Tisnovsky says the worldwide pool of developers serving the United States in application development and maintenance amounts to about 25 percent located offshore.
When it comes to outsourcing IT operations and infrastructure, Tisnovsky says there are two components: the asset-heavy model where a supplier takes ownership of a company’s IT assets and the asset-light model where the service provider merely manages and controls a company’s IT assets.
“If a U.S. company would like to consider the use of offshoring as a value lever in infrastructure outsourcing, there’s a more important decision for them to make before that, which is what they plan to do with their IT assets,” Tisnovsky says.
Multinational providers are the most likely options for the asset-heavy model, while foreign providers become a viable option in the other case.
Neither of these options is without risk and that’s where a company like Jefferson Wells comes in. Jefferson Wells is a professional services firm with an office in Phoenix. MacDonnell “Don” Ulsch is its director of technology risk management and author of the new book, “Threat! Managing Risk in a Hostile World.”
His company helps clients make informed judgments when it comes to IT offshore outsourcing. For example, it’s important to make sure a providercan protect data. Don’t choose one based on price alone.
When selecting an offshore service provider, considerations include knowing a country’s history, investigating a company’s hiring process, understanding physical and geographic risks, and documenting a company’s security-related policies and procedures.
Ulsch says IT offshore outsourcing is a reality of business.
“Clearly there is a certain amount of work that is going to go offshore. I don’t even think that’s a question,” he says. “To be competitive in a global environment, there’s probably no other solution.”