International Companies Take Outsourcing Bite

BOSTON (04/03/2000) - U.S companies are increasingly using offshore outsourcing firms for software development projects, according to a recent report from International Data Corp. (IDC).

Firms of all sizes are turning to offshore companies because of the IT skill shortage in the U.S., the rising cost of domestic labor and the proliferation of Internet technologies. The report, titled "Mapping Offshore: A New Competitive Landscape," looks at the growing use of foreign IT providers from India, Mexico, South Africa and the Caribbean.

According to IDC, the gap between the number of IT workers needed in the U.S and the number actually employed will reach 328,660 in 2002, from 72,003 in 1995. That scarcity of skilled resources will drive an increasing number of companies to use some offshore IT services, the report said.

Offshore providers in India, Mexico, the Caribbean and South Africa -- the regions studied by IDC -- are also providing more complex services than before, the report said. While companies previously outsourced legacy applications, maintenance and remote processing, now they are turning to offshore service providers for Internet services, applications hosting, ERP (enterprise resource planning) customization and business process outsourcing, according to IDC.

IDC analysts also noted that perceptions have changed with regard to the "sweat shop" image of offshore service providers, and the companies studied insist that they offer good working conditions and opportunities for staff members to advance.

Factors driving the use of offshore services include the ability to staff up quickly as needed for projects, to find people with specialized skills, to turn development projects around faster and even get higher quality. Cost savings are an issue but are declining in importance, according to IDC.

IDC found that previous concerns about cultural misunderstanding and miscommunication, which were long viewed as outweighing cost-effectiveness, have been alleviated by service providers. For example, often one or more members of offshore groups are stationed at the client side, and some companies, such as Wipro Infotech in Bangalore, India, also go the extra mile to give a cultural introduction to Indians to foster good communications with their customer.

India, the report found, is the most mature region for offshore projects and offers a great variety of skills, cost advantages, government support and fluency in the English language. Tata Consultancy services (TCS), headquartered in Bombay, has a reputation in the U.S for the array of services it offers but also because of the partnership it boasts with U.S IT providers such as Microsoft Corp. and Sun Microsystems Inc. With clients such as General Electric and Prudential, TCS made $400 million in revenue in 1998.

Referred to as "nearshore" for their geographic proximity, the fast-growing Mexican and Caribbean markets offer alternatives to India in terms of the variety of skills they offer and their cultural closeness to the U.S. But according to the report, they also show a number of disadvantages such as their lack of experience and relative lack of English in comparison to India. Their cost effectiveness also does not match their Asian counterparts.

South Africa suffers from the same IT skill shortage as the U.S, but according to IDC, it provides a great infrastructure and competitive costs because of a soft currency. "In a global market, highly skilled South Africans are an extremely sought-after commodity and frequently poached by foreign firms," the report said.

IDC sees the landscape for IT services becoming more and more competitive as overseas companies gain momentum. It predicts that companies are going to increasingly use multiple offshore vendors in different parts of the world, as already is the case with such customers as American Express, General Motors and J.P. Morgan.

IDC, in Framingham, Massachusetts, can be reached at +1-508-872-8200 or on the Web at

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