Wednesday, August 31, 2005

Indian to headline outsourcing summit

The International Association of Outsourcing Professionals (IAOP) has announced that Pramod Bhasin, President and CEO of Gecis Global, is among the speakers headlining its 2006 Outsourcing World Summit.

The 18th event in the worldwide conference series that began in 1998, the 2006 Outsourcing World Summit will take place February 20-22, 2006, at Disney's Contemporary Resort in Orlando, Florida.

Gecis Global that Bhasin heads is GE's recently spun-out BPO industry giant. Along with Bhasin are business process management guru, Tom Davenport and renowned leadership expert Oren Harari.

"The great thing about the summit is the way it brings together customers, providers and advisors for a once-a-year 'big bang' of new ideas," said IAOP Executive Director Mike Corbett.

"These outsourcing professionals, who are responsible on an average for more than $60 million a year of outsourcing spending, are seeking the latest thinking, management approaches and lessons in making outsourcing work for them."

Tuesday, August 30, 2005

Cost-cutting drives outsourcing growth

New research indicates that companies providing IT products and services will continue to increase their use of outsourcing agreements in order to lower overhead expenses.

According to a report published Monday by Evans Data, which culls information from developers at tech companies, 33 percent of businesses surveyed intend to increase their use of outsourcing during the next year, while only 6 percent said they are planning to decrease their number of outsourcing pacts.

Outsourcing involves the process of transferring work to an outside company rather than keeping it in-house.

In terms of overall workload, 45 percent of respondents to the Evans survey said they outsource less than a quarter of their development operations, with only 7 percent reporting that they farm out better than 50 percent of that sort of work.

According to the study, companies are focused increasingly on outsourcing as a way to cut costs rather than find specific expertise, reversing a trend of years past. Some 28 percent of the companies participating in the survey said that saving money was their primary goal in adopting outsourcing pacts, while only 19 percent listed a demand for specialized expertise as their objective.

By contrast, only 15 percent of the companies surveyed in 2000 listed cost cutting as a main driver for outsourcing, while 44 percent said they used the arrangements specifically to garner skilled talent.

Researchers at Evans said that they expect the trend toward budget-related outsourcing to continue to grow.

"Outsourcing once made use of high-level experts to bring particular expertise to a development project, but now we're seeing that outsourcing is much more likely to be used to save development costs," John Andrews, chief operating officer at Evans, said in the report. "Most companies outsource lower-level programming tasks that are more cost-effective to (farm out), rather than devoting an in-house programmer to such jobs."

According to the study, which included input from more than 400 individuals, 61 percent of companies surveyed plan to increase their IT-related investments over the next year, compared with 53 percent one year ago. Only 10 percent of survey respondents said they plan to reduce technology spending during the next year.

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Caution Marks Outsourcing in China

Lured by a skilled work force and rock-bottom wages, IT customers are eyeing China's outsourcers longingly, with one major misgiving: the risk of losing intellectual property. To take advantage of the opportunity while still protecting sensitive data—customer records, proprietary business practices, patents, copyrights and trade secrets—some U.S. companies are taking a slow and careful approach to dealing with Chinese outsourcers. The resulting rewards are modest, but the developing knowledge and trusted relationships promise bigger gains in the future.

Ozburn-Hessey Logistics, a transportation and storage management company in Nashville, Tenn., needed a labor productivity management tool for its warehouses. Six months ago, the company contracted with Chinese software developer Powerise International Software Co. Ltd. to write the software.

"It's an add-on to our warehousing software that shows individual and team productivity," said Bob Spieth, CIO at Ozburn-Hessey.

In connecting with Powerise, personal connections between a Chinese-American Ozburn-Hessey IT staffer and Powerise personnel were key. Since the project is small and does not include trade secrets or other critical corporate data, Spieth said he's not concerned about security risks.

However, if the project is successful, Ozburn-Hessey may want to invest in more strategically significant, and potentially riskier, work.

Another executive at a U.S. cosmetics maker also vouched for the virtues of starting small and relying on personal contacts. In setting up a manufacturing facility in China, he hired a trusted individual with nine years of experience working in China and 20 years in the cosmetics business to handle his company's operations on the ground.

"It's difficult to sue people, to have an SLA [service-level agreement] and to enforce it. So reputation is critical, and you have to have a great relationship with the people that refer you and the people you're dealing with," said the executive, who asked not to be named. "We're not going through outsourcing companies but going into the country itself."

In another project, the executive is working through a U.S.-based Chinese national to set up an office in China to test server security. While initially small, the project could be expanded into a help desk or other IT support facility.

Chinese outsourcers know that protection of IP is perceived to be an Achilles' heel of their country and their business, so they are ready with the right answers.

"It's probably the most overhyped issue. I have never had that problem, but perception is reality," said Walter Fang, vice president and chief technology officer of Neusoft Group Ltd., a software house based in Shenyang, China.

Founded in 1991, with annual revenues in 2003 of $270 million and 6,000 employees, Neusoft is among the more established Chinese software developers. Specializing in software for medical equipment such as MRI (magnetic resonance imaging), CT (computerized tomography) scan and ultrasound machines, the company has also co-developed human resources application software with Hewitt Associates LLC, of Lincolnshire, Ill.

"We cannot afford to be sued. That gives us a very good motivation," said Fang. To avoid a legal confrontation, Neusoft takes copious precautions, including maintaining a geographically separate development center for each client project and welcoming on-site liaison managers from client companies.

"Only employees on a given project can go to a given center," said Fang, adding that printers and USB drives are prohibited. Employees must sign a nondisclosure agreement in order to begin work and must sign another NDA should they depart the company. Fang also pointed out that U.S. and Chinese laws govern the contracts, which typically include Singapore as a site for independent arbitration in case of disputes.

William Bierce, a partner at Bierce & Kenerson P.C., in New York, said that Sweden is also a popular destination for dispute resolution.

"The Chinese are concerned that things will be slanted toward a Western point of view. Sweden is near Russia and has historically been neutral," Bierce said. Sweden became popular as a mediation zone during the early years of détente between the United States and the former Soviet Union, noted Bierce.

China's history has led the country to adopt a unique outlook on business, said another attorney. "They did away with property in terms of Communist theory. Now they're trying to establish the recognition of intangible property rights in a country that is pretty poor," said David Weild, a partner at Fross Zelnick Lehrman & Zissu PC, a New York law firm specializing in IP.

Monday, August 29, 2005

Outsourcing: Small companies facing grim battle against big players

Small and medium-sized Indian outsourcing companies are finding it difficult to survive in the face of immense competition from big players in the trade, revealed a seminar on ‘Strategic Outsourcing: Risk Management, Methods and Benefits’ organised by Tathya.com, a city-based outsourcing service provider.

The primary objective of the seminar was to foster the exchange of ideas between providers, outsourcers, and industry analysts in the presence of people from different sections of the society.

The seminar was inaugurated by Sujan Chakrabarty, MP and was attended by G D Gautama, principal secretary, Department of IT, Government of West Bengal, among others.

‘’Two major problems come up in providing the job that a foreign company wants to outsource. First, there is a culture barrier, and second, there is a huge difference between the systems that govern the concerns, both Government and non-Government, in the two countries. It’s difficult to overcome these problems and that is why small outsourcing companies suffer setbacks,’’ said Indranil Mukherjee, managing director of Tathya, which has a turn-over of Rs 1.50 crore with a staff strength of 180.

The way out is to do business with a smaller number of companies and take time to build a relationship with them. ‘’We are against the Hyderabad or Bangalore model of aggressive outsourcing. We take time to nurture relationships with the companies we do business with, ’’ Mukherjee said.

The seminar was attended also by representatives of several US buyers.

G D Gautama presented the case of West Bengal as an ideal destination for outsourcers from abroad. ‘’Very few people know the fact that Kolkata has got the highest internet penetration among all the cities of India. We have 235 IT companies working here and we believe West Bengal is going to be the ideal place for clients abroad to outsource their jobs,’’ Gautama said.

India’s outsourcing sector needs power - India plans to import Uranium provided suppliers guarantee a lifetime supply

India’s outsourcing sector needs power and the demand will quadruple in coming years. If India cannot provide power, the outsourcing sector can just collapse. India plans to tap the nuclear power sector for guaranteed energy supply in coming years.

Will India import natural uranium in the coming years? "Yes, provided a continuous life-time supply is assured by the suppliers," according to Chairman of India's Atomic Energy Commission Anil Kakodkar. "India is willing to buy natural uranium from other countries provided the life-time supply is guaranteed by the suppliers," Kakodkar said.

Kakodkar made it clear that the current reserve of natural uranium available in the country could only support 10,000 MW programme. "With availability of uranium from outside, one could also think of expanding pressurized heavy water reactor program beyond 10,000 MW," he said.

"Natural uranium from outside will be much cheaper than what we spend to produce from Indian mines as the uranium content in ores from Indian mines is less than 0.1 per cent while in the mines abroad, it ranges from one to 15 per cent," he said.

Moreover, all these external supply will be under international safeguards and "we have absolutely no problem in it," Kakodkar said. However, "we will continue to expand our indigenous mining and processing of natural uranium in Jharkhand and in other places for the PHWR reactors," he said.

For Tarapur Unit 1 and 2 located near here, Nuclear Power Corporation of India Ltd imported low-enriched uranium from China in 2000 which lasted for five years while uranium imported from Russia in 2003 will last up to 2007, according to Chairman and Managing Director NPCIL S.K. Jain. In 1969, The General Electric of US supplied uranium when they built India's first two boiled water reactors at a rated capacity of 210 MW each which now run at a re-rated capacity of 170 MW and are already under safeguards.

Following Pokharan I and subsequent sanctions, the US reneged on its commitment to supply the fuel. However, after an agreement between the US and India during the Reagan Administration, France stepped in. But France too stopped supplies in 1992. The French fuel lasted till about 1995 when India was forced to negotiate with China.

Therefore, India had to look for suppliers who will supply natural uranium to expand its PHWR programme besides the low-enriched uranium for the boiling water reactors of Tarapur and any future imported plants. Russian fuel is cheaper than Chinese, he added.

Even though India is not a NPT [Nonproliferation Treaty] signatory, it has in practice observed Article One of the treaty which bars transfers. The Indo-US agreement this July only formalizes and reinforces India's commitment. India already has an impeccable record of safety and export control regime and the July agreement is linked to the enactment of strengthened export control legislation, nuclear officials said.

Sunday, August 28, 2005

Outsourcing and out of control

BA must be reflecting that there's no such thing as a cheap lunch. When it sold off its in-flight catering arm to Swissair in 1997, it only seemed to be doing what everyone else was. Outsourcing, together with its sibling, offshoring, has become a seemingly unstoppable management bandwagon.

Outsourcing adviser TPI estimated that major outsourcing deals - those worth more than $40 million (£22m) - totalled $58 billion last year, while adding in smaller deals and related consultancy would multiply that figure several times. The UK spent £2.5bn on outsourcing advice alone in 2004, much of it in the public sector. BA itself has more than 2,000 outsourcing relationships in place.

For BA, as for other companies, there is a management rationale for outsourcing a function previously done in-house. The doctrine of 'core competencies' suggests that an organisation is better off cultivating the few things it is distinctively good at and farming out the rest. This is not new: companies have always had to make trade-offs between making or buying.

However, what made outsourcing a hot ticket was its application in the 1990s to IT, which not only lent itself to outsourcing as a function; by the same token, other functions based on it, such as HR and administration of all kinds, could also be hived off to third parties. Services as well as manufacturing could be taken apart, farmed out, then reassembled seamlessly at the point of delivery.

As a result, a growing army of eager vendors queued up to offer an increasing range of processes that went deeper and deeper into the heart of the firm. At the height of the internet boom, excitable observers were suggesting that conventional companies would eventually disappear, being replaced by fluid networks that constantly reconfigured themselves. 'Outsource everything except your soul!' exhorted arch-guru Tom Peters.

As with much in management, however, outsourcing has a less obvious agenda. To find out what is really driving its exponential increase you have to look at the incentives. The major impetus is not what it does to operational but to financial performance.

Taking assets off the balance sheet increases reported return on assets at a stroke, just as the reduction in headcount boosts revenues per employee. Moreover, it is far easier for the firm that is outsourcing to use market pressure to cut costs - by threatening to switch suppliers - than it would be to do so internally. In effect, it offloads the difficult task of operational improvement to the supplier.

Lower costs drop straight to the bottom line; higher earnings leveraged by high price-earnings ratios boost the share price; rising shareholder value increases executive pay - at least in the short term.

The financial engineering angle explains why outsourcing is so much more important in the Anglo-Saxon economies, with their emphasis on shareholder value, than in continental Europe. By the end of the 1990s, US manufacturing firms were outsourcing between 50 and 70 per cent of the value they added. But in the long run operational considerations have a nasty habit of reasserting themselves - as is happening with BA.

Suppliers' margins cannot be squeezed ad infinitum, particularly when there are only two of them, as in the case of global airline caterers, and both are in financial trouble. BA has already had to improve the terms of its contract with Gate Gourmet to allow it to survive, thus negating part of the point of the deal.

As many companies are finding, outsourcing has hidden costs that over time diminish its apparent advantages or even wipe them out. These are simply not captured in the economic model. The most obvious is control when things go wrong, as at Heathrow.

But basic operational knowledge is also a casualty. When Gate Gourmet's new owner, Swissair, collapsed, the caterer was bought by Texas Pacific, a private-equity group. Private equity, too, is all about finance: companies are loaded with debt and sweated mercilessly with a view to being sold on as soon as possible. So Gate Gourmet was under huge pressure to drive down costs (mostly labour) from both its customers and its owners.

If the airline had still been in charge, it would have known the strain and risk to which it was submitting its supply chain. It would have also known that its baggage handlers and support staff were not only members of the same trade union as the catering workers - they were their husbands and brothers. Whatever they say in public, companies typically outsource to cut costs. But because they fail to look at the process as a whole, they often end up increasing them.

In BA's case, the airline estimates that the summer chaos has cost it at least £30m, but who knows the real total in terms of damaged reputation and lost custom in the future?

Conventional wisdom says that companies should never attempt to outsource problems or risk, and for once it is right. The only way to make outsourcing work is to know as much about the function and to put as much work into managing it as the company you have handed the job to. In which case, of course, you might equally well do it yourself.

Saturday, August 27, 2005

China takes a chip off India model

Mention software outsourcing and one thinks of Bangalore which has more than 150,000 software engineers. India's Silicon Valley and other well regarded technology hotspots around the country are at the cutting edge because of a highly skilled pool of computer science professionals who have a good command of English. They have made outsourcing software development a viable option for multinationals and overseas businesses.

This was not always the case, but by proving its critics wrong India has made it easy for China to follow suit, says John Cestar, co-founder and co-CEO of Freeborders, which develops outsourced software links on the mainland.

"India is our best ally in this - when India started no one thought it would work," he says. "But now India has already broken through so none of our clients ask themselves should we outsource. The question is rather where we should go and with whom. Because India can do that, you don't have to spend time convincing people that can be done."

While the firm's headquarters are in San Francisco, Freeborders employs just under 500 staff at its facilities in Shenzhen, developing custom software for the financial services, retail, and high-tech/software industries. With a further 120 business experts and analysts based in the US and Europe, the company develops software in China and delivers to a US-based, mostly Fortune 500 clientele.

"The trick to this business is being on both sides of the world. You can't just have a tech team in Shenzhen," notes Cestar.

From retail to banks

Freeborders began its Shenzhen operations with retail clients, principally because of that category's familiarity with doing business in China. "The evolution of the business is interesting. We started with retailers such as GAP and Levis. The reason is that these companies consume a lot of custom software, but they are also very comfortable in China. They get core products from China and are in the supply chain. China is not so mysterious to them," says Cestar. "We went to school with them, developed our map on process maturity and built up a track record."

But while the retail category still constitutes half of Freeborders business, the big money is in financial services. Banks typically budget 10 per cent of their revenue on technology of which half is spent on software development, of which half again can be outsourced, explains Cestar. This can run into the low billions of US dollars. Retailers, by contrast, may spend just 2 per cent of revenues.

Momentum for financial services to outsource to the mainland began to pick up two years ago. "When we started the business six years ago you couldn't find a single bank in the world to go to China with their software. They didn't think the IP (Intellectual Property) security situation was firm enough," says Cestar.

China's higher profile over the last two years in this hugely sensitive industry can be attributed to a number of conditions both inside China and beyond its borders. The mainland's emergence has occurred partly because India has become a victim of its own success: rising wages makes Freeborders about 40 per cent more cost-effective, says Cestar. "There wasn't a problem in India two years ago, but India has had 60 per cent wage inflation in the last 18 months and they are passing it on to their clients now. Also a lot of banks say they have to diversify somewhat just as a matter of risk mitigation and cannot be 100 per cent in India. The Indian model works, but they are asking where else in the world can they get the scale and a huge talented pool of software engineers? The only other country is China."

India's own success and China's position as a top growth market in the financial services industry has also helped demystify the PRC. But the aim of any outsourcer is for a financial service to become confident enough in the firm to entrust it to operate inside its firewall where the largest-scale projects are. While it has entered the firewalls of some of its retail clients, Freeborders has yet to achieve that with a bank. "We're not there yet, no one in China is. But if you get to that level of trust, then the business is massive."

Pros and cons

Despite cost advantages, China does have unique challenges, says Cestar, citing language and IPR security as foremost among them. "But you can solve them at a company level," he adds.

For instance, one strength of the Indian industry has traditionally been its native level proficiency in English. Not necessarily the case, says Cestar. "My view is that if they are hanging their hat on that peg, it is a very weak peg," says Cestar. "Our facility is English speaking, our people know that it makes them valuable."

Fluency in English is recognized as being critical to a successful career in software development in China. Without it, even the most gifted engineer will be restricted to dealing with China's domestic market where margins are much thinner. Moreover, a computer science PhD in China will already have ten years of spoken English and strong English skills, and full-time teaching staff are employed to improve proficiency. "An all-English environment is very important in this business. We will not promote someone without passing English exams. You can be the greatest technologist in our company, but if you are not good at English you are not going to get promoted."

Secondly, the issue of IPR can be tackled with the right investments in security and processes. "The systems we use require a lot of investment in systems and in processes which is very expensive," says Cestar.

He emphasizes Freeborders' CMMI (Capability Model Maturity Integration) level 5 (the software industry standard on a company's competence, security and reliability) - saying that only 34 companies worldwide have achieved that level.

"You have to convince the client that you are outsourcing to a company rather than a country. We happen to be in China and we happen to enjoy the structural cost advantage. But if you have made those kinds of investments that are recognized as world class, then you can pass the tests. We have never had a client not come with us because of IP issues," he says.

Within China, the company sees limited competition. In northern China, Dalian and Qingdao also boast some world class software outsourcers but they specialize in the lucrative Japanese market - equally as demanding in standards as the US and Europe.

Large multinationals like IBM and Microsoft localize their products to sell in China and should not really be considered to be outsourcing operations, says Cestar.

He believes that complacency in India over competition from China may end up hurting it. "The good news is that they are very dismissive of it (China) right now," he says, but China's superior infrastructure will also give it a healthy edge.

"What we tell our clients is to go to Bangalore first then fly over the Himalayas and land in Shenzhen. The traffic moves, the infrastructure is new. Bangalore is a third world city, it's a mess."

Bangalore's world-class privately funded facilities operate within a congested traffic system and unreliable power-grid. Moreover, China has invested impressively in provincial technology education, producing between 250,000 to 350,000 software engineer graduates every year, in contrast to India's less broad based education system. This equates to six times as many as in the US and three times the number in India.

'HR more important than tech'

Such advantages have not been lost on Indian companies, with some setting up shop in China. While Cestar acknowledges that competition is fiercest from India, whose companies provided the original blueprint for success, he believes that translating their business model may prove problematic. "No matter where in the world the Indian company is, the Indian managers are running the show. In the US and Europe this is fine, we are very multicultural societies. But it's a little more challenging in China," he says. "For example, I could never run our facility in China: they would look at me and say we are all working 20 hours a day why is that guy getting paid more than I am. This leads to big morale problems and it's a highly sensitive issue in our industry as people are highly educated and extremely talented. The Indian model tends to use an Indian manager. I don't know for sure, but in our experience that wouldn't work for our company."

Instead, Freeborders has a top-layer management team made up of mainland Chinese but recruited from the West. "These are people who really understand what it means to deliver to Western quality levels."

But perhaps the biggest challenge for software developers is maintaining an effective HR (Human Resources) programme. "Running a very tight HR programme is what this game's all about - HR is more important than technology actually," says Cestar. Being able to scale up while keeping the standards is an ongoing process and staff are reviewed "at least" five times a year. "You can be on a team and that is outstanding, but 10 per cent of that team will be fired because we want to keep the bar extremely high."

Cestar believes that India will enjoy the majority of the outsourcing business for the next ten years, but says that with its track record, process, and HR screening, Freeborders will be well placed to grow its Shenzhen operation to 1,000 people early next year. "India is the model. With 500 people we are tiny by Indian standards - Infosys has 30,000 people and Wipro hired 2,000 people last quarter. But if the banks send 10 per cent of their business to China which they will do - just out of risk mitigation they'll do it - it will be huge business."

Friday, August 26, 2005

3 counting on outsourcing IT

Three UK - the 3G mobile outfit owned by Hutchison Whampoa - is looking to outsource its IT development work to Siemens, sources claim.

At this stage it's not known how far negotiations have progressed. Staff have yet to be told of the changes although insiders say that an official announcement is due shortly and could be made before the end of the month.

Details of the outsourcing remain sketchy, but it's understood that part of the reason for the move is to cut costs at the mobile phone outfit ahead of a bid to float the business.

The UK arm is expected to hit positive EBITDA this year, and parent group Hutchison Whampoa may look to float it before mid-2006. A spokesman for 3 UK was asked to respond but declined to comment on "rumour and speculation". As did a spokesman for Siemens.

Thursday, August 25, 2005

A bad rap for outsourcing?

I'd have thought that by now outsourcing would be about as controversial as sending your suit to the dry cleaners, but this hasn’t prevented a rash of articles with headlines like "the folly" or “the perils” of outsourcing.

Take Steven Downes, business editor of the Times: “Outsourcing has become something of a dirty word…especially among…anyone who has tried to use the services of an outsourced call centre. Choruses of "I told you so" were also heard…when news agency Reuters moved one of its departments to India, and someone there pressed the wrong button at the wrong time.”

Comments like this make me suspect that there’s a lot of racism fuelling this debate. British people clearly react against certain accents on the phone--I doubt they even consider that the nice Scottish and Irish people at their favorite bank may themselves be outsourced. And, frankly, what do you expect when you entrust someone with dark skin with a complex technical operation like button-pushing?

Take this unpleasant undertone away and you’re left with the fear of the new. If you’re mugged in the street, well, it’s a tough world. If your online bank account is “phished”, it’s the Internet’s fault. We should never have changed the existing order of things; we have brought destruction on our own heads by meddling.

According to the Guardian’s Polly Toynbee, for example, the Gourmet Gate story should become “a business-school exemplar on how the subcontracting culture can bring down a company.” BA is doomed apparently, because it has “trash[ed] its good name…by contracting out a service that is vital to its marketing success” (In-flight catering? Really? I’d rather bring sandwiches…).

The blame, of course is with the consultants who advise clients to toy with the madness that is subcontracting. The normally quite sensible Simon Caulkin recently wrote in the Observer that “with management everything conventionally regarded as good is actually toxic.” Who was telling us otherwise: “a whole ecology of improvers - consultants, IT vendors, outsourcers and peddlers of tools of all descriptions.”

With no apparent sense of irony, Caulkin referred to recent study by “improvers” Deloitte Consulting, which suggested that outsourcing often disappointed. Since this survey has become embedded in the mythology that Outsourcing Doesn’t Work, it’s worth revisiting its headline conclusions: 70 per cent of respondents have had “significant negative experiences” (rather than utter disaster) with some of their outsourcing deals, and a mere one in four were bringing services back in-house. Not the end of outsourcing then, which must have come as some relief to Deloitte, named top outsourcer by Information Week last year.

All this is rather odd because The Gourmet Gate affair—I suppose we should call it GateGate—isn’t really about outsourcing. It is an object lesson in not bankrupting your suppliers, whoever they are. BA used its power as the sole purchaser of Gourmet Gate’s services to drive costs down beyond Gourmet Gate’s ability to respond—principally because of the TUPE undertakings covering the staff it took on from BA. It’s hard to see how keeping catering in-house could have squared that circle.

If commentators want to know what’s really going on with outsourcing, they should look at the lifecycle of any fashion, business or otherwise.

“Early adopters”, whether of outsourcing or the mini skirt, get significant benefits either in profits or popularity. As others follow suit, the competitive advantage erodes and people who frankly shouldn’t have been seen dead in that style start appearing on the street. And then the world moves on.

Similarly with outsourcing—a lot of the low-hanging fruit has gone, and companies have to work harder to gain significant advantage. Worse, because a lot of those early success stories were “no-brainers”, outsourcing gained appeal for those managers who are more comfortable when not using their brains. A badly thought-through decision is a badly thought-through decision, whether it’s outsourcing your call centre or buying a safari suit.

As outsourcing becomes more widespread and mature, and the competitive landscape changes, we should expect some bad or disappointing experiences. We should also expect services to occasionally come back in-house, and the best outsourcing contracts now explicitly recognize this fact. We should expect more sophisticated models—shared services is making a major comeback, as companies try to get the best of both worlds. And we should hope that the armchair pundits would move on to something else.

Wednesday, August 24, 2005

Indian outsourcing too expensive

NUMBER CRUNCHERS at Gartner are predicting doom and gloom for the Indian outsourcing biz.

The Big G says that India’s wage bill for developers is sky rocketing and its share of the outsourcing market could fall by as much as 45 percent by 2007.

Gartner says that the ancient land is having to face stiff competition from cheaper, or closer countries such as the Philippines, Malaysia, Vietnam and Eastern Europe and they will not cut the mustard.

The main reason is that India’s wage bill is getting too high, with call centre staff now demanding between $159-$204 a month when before they only wanted $114-$136.

At the same time the country’s infrastructure is not keeping pace with the rapid growth of the industry.

Outsourcing does work but must be done correctly, say experts

The trouble caused to British Airways by the Gate Gourmet dispute has shown that one of the few things that no company can outsource is the risk of a serious breakdown in its supply chain. The lesson is not that outsourcing does not work, management experts say, but that it needs to be done correctly.

Outsourcing is one of the most powerful trends in modern business life. Accurate figures for the total value of services outsourced in the UK are hard to come by, but £2.5bn was spent on consultants advising on and managing outsourcing projects alone, according to the Management Consultancies Association.

Is India's outsourcing honeymoon over?

Surprise! India's reign as the world's "Outsourcing King" may be slipping, even with its rock-bottom call center costs.

A new report from market research firm Gartner, Inc. warns that a labor crunch and rising wages could erode as much as 45 percent of India's market share by 2007.

Indian industry watchers acknowledge that the country's outsourcing industry -- its golden goose of the moment -- is indeed facing a "serious" problem.

In an interview with CNN/Money from New Delhi, Kiran Karnick, president of the National Association of Software and Service companies (NASSCOM), said he's concerned that these challenges could stymie India's strong double-digit growth in outsourcing services.

NASSCOM is the trade body representing India's information technology (IT) software and services industry.

More importantly, the Gartner report cautions that a host of emerging countries such as the Philippines, Malaysia, Vietnam and Eastern European nations including Hungary and Poland, are also starting to challenge India's leadership in offshore business process outsourcing (BPO.)

Many U.S. and international companies maintain that outsourcing business processes such as customer service call centers, administrative and accounting processes to low-cost and low-wage countries like India helps to keep down their own cost of doing business.

Analysts say India's "go to" status as a premier outsourcing destination is a function of the country's vast pool of about 2.5 million mostly English-speaking graduates that are ready to enter the workforce annually.

But India can't afford to rest on its laurels, said Sujay Chohan, one of the authors of the Gartner report and vice president and research director of offshore business process outsourcing with Gartner in New Delhi.

Unless India devises a long-term roadmap to improve infrastructure and consistently grow its skilled labor force, he said India will see some of its offshore BPO clients shift business elsewhere.

"Although India's infrastructure is improving, it is not keeping pace with the rapid growth of the industry," the report said.

The Gartner report pointed out that while no single nation yet poses a direct threat to India as a high-quality/low-cost location, over the past two years, more than 50 other countries have emerged that together could pose a viable challenge to India in the months ahead.

Gartner estimates that India's current 85 percent ownership of the BPO market share could dwindle to about 45 percent by 2007.

In dollar terms, that would be a significant blow to India, Chohan said. In 2004 India raked in more than $2 billion of an estimated $3 billion global offshore BPO market with more than 250,000 workers.

He estimates that the worldwide offshore BPO market will grow to about $24 billion by 2007 of which India will earn about $13.8 billion.
Rising labor costs

Given that India's been doubling its outsourcing operations every year for the past four years, Chohan said he's not too surprised by the current imbalance in the labor demand-supply equation as well as the onset of wage inflation and high levels of attrition.

"Four years ago, a typical call center employee would have earned between 5,000 to 6,000 rupees ($114- $136) a month. Now it may be up to between 7,000 to 9,000 rupees ($159 - $204) a month," he said. "The rise in labor costs isn't significant yet. What's more important is that these increases so far have not been passed on to clients in the U.S."

But if these costs continue to escalate, he predicts that Indian outsourcing firms will take a hit to their bottom line and eventually start to pass along the increases to their international clients.

Chohan said India could learn from Ireland's mistakes more than a decade earlier.

"This is exactly what happened in Ireland in the 1990s," said Chohan. "As a result, companies that were outsourcing to Ireland began to look elsewhere and discovered India for the lower-level work," adding that Ireland today still attracts what's considered to be "high-value" outsourcing such as R&D and software development.

Chohan isn't worried about India losing it lead in IT outsourcing. "India dominates now and will continue to do so in the future because of the sheer scale of skills in the country at low costs. The only exception is China which has become very visible in this space within the last six months."
Moving beyond call centers

Ashank Desai, chairman of Mumbai-based Mastek, said one way for Indian companies to maintain their competitive advantage and ensure their international clientele is to upgrade their services by offering more sophisticated back office functions in addition to the basic call center services.

Mastek is a provider of offshore IT and BPO outsourcing services. The company logged annual sales of $130 million in 2004.

"At Mastek we're already looking into merging BPO and IT services so that our clients get double the advantage,' Desai said.

He gave an example, "We can reconfigure IT used for processing insurance claims to make it more efficient and then process these claims more efficiently for our customers."

In order to emerge as truly global players and undercut the competition, Chohan said Indian outsourcing companies should also think about expanding their brand globally by setting up delivery centers outside of India.

Indian vendors depend too much on the U.S. market. India has to make inroads into non-English speaking markets as well, "similar to what Ireland has done to successfully service the European market," he said.

Outsourcing does prov’l gov’t good

Outsourcing of heavy equipment for the repair and maintenance of provincial roads allows the provincial government to save resources. What used to be a six-month work of the then provincial engineering task force can now be accomplished in less than two weeks.

Governor Gwendolyn Garcia yesterday announced that they are already about to complete the Phase I of the Capitol asphalting project. She said that aside from the short period in the completion of the project, the performance level is also far beyond what the task force before had executed.

She also mentioned that the province was able to save money using this scheme because it has done away with paying the overtime of the personnel and the maintenance of the equipment. She finds outsourcing of equipment advantageous to the province because the equipment is rented on a per-hour basis.

The governor said that in less than two weeks the asphalting of the 6.7-kilometer Kayaan-Dakit and the 12.3-kilometer Libertad-Udlot roads in Bogo will be completed. A 6.10-kilometer Lunas-Sta Lucia road in Asturias has already been completed including the Lamacan-Mangyan-Candaguit road in Sibonga and Ylaya-Kantangkas road in Dumanjug.

The rented equipment is now in Lamac, Pinamungajan, and Daanlungsod in Tuburan.

Tuesday, August 23, 2005

Pressure on to protect privacy in outsourcing

Privacy-law experts expect provincial and federal governments to be pressured for more laws to protect confidential information that is now ending up in the hands of foreign-based private businesses because of government outsourcing.

No laws exist in Canada to restrict the flow of information in the private sector, says Theodore Ling. But, while Canadians fear the U.S. government may be able to gain access to this material under anti-terrorism laws, they also realize that Canadian businesses are net beneficiaries of the trend toward outsourcing,

At the federal level, the controversy over government information outsourcing came to a head last year, when New Democrat MPs revealed the government had awarded a contract for the 2006 census to a Canadian subsidiary of Lockheed Martin.

At the provincial level, in 2004, the British Columbia government was pressured by its public-sector unions to stop its plan to outsource the management services of its health insurance and pharma-care systems. Rather than back down on the proposal, the government passed stringent rules regarding the protection of the data.

Outsourcing of data management is a huge business. The government of the United Kingdom outsources $140 billion worth of services, an amount nearly equivalent to Canada’s entire federal spending. Canadian and U.S. governments are catching up, and, because of Canada’s English-speaking workforce and relatively low labour costs, it is a preferred location for U.S. firms.

(U.S. politicians, however, have tried to block foreign outsourcing of data management. The U.S. Senate passed a bill to prevent the practice, but it was not enacted.)

And, while Canadian unions claim outsourcing of government services will cost as many as 75,000 jobs, proponents of outsourcing say Canada could see a net gain of 165,000 jobs.

Theodore C. Ling of Baker and McKenzie LLP in Toronto said firms are watching to see whether the policy of the British Columbia government becomes the norm across the country.

“The situation in B.C. has been of high interest to any company that might be engaged in outsourcing because it’s the first time we’ve seen a government change a law to restrict that type of outsourcing activity,” Ling said.

“It has evolved from a specific situation where Canadian public sector workers were going to lose jobs. But (the B.C. policy) affects only the public sector. No laws exist to restrict the flow of information in the private sector,” he said.

The B.C. statute is similar to laws in many European countries. It prevents disclosure of information based on foreign court orders. Critics of foreign outsourcing say the law does not go far enough, since there are now about 350 laws in the U.S. that allow police and prosecutors to demand information without a court review.

The penalties under the B.C. law are a $2,000 fine for individuals and $500,000 fines for corporations. However, U.S. courts have ruled that criminal sanctions in a foreign country do not prevent U.S. courts from compelling production of information.

Ling said businesses are concerned that the federal government is going to use its regulatory powers over sectors of the economy such as banking and transportation to toughen privacy rules in Canada, and for Canadian information held abroad.

“Service providers are mobilized to say to government ‘Hey, don’t be too quick to expand these laws. That will affect our ability to get this kind of work or outsource this kind of work. This would be very bad for the Canadian economy,’” Ling said.

“The question before us is: Will the federal or provincial governments want to restrain the flow of information?

“There are people who will care about their privacy rights because the concern is so much greater in the public sector. It was information about the public. In the private sector, companies handle information about their business partners and their employees.

“So you may see the federal government try to change laws or put in place guidelines about how the federal government outsources government activities. You may see industrial guidelines. I don’t think we will see new laws in Canada that restrict that flow of information from Canada,” he said.

But Lydia Wakulowsky, chairwoman of the health law group at McMillan Binch Mendelsohn LLP, said there’s such a gap between privacy laws in Canada and the U.S. that many privacy advocates are worried about the flow of information over the border.

“The U.S. federal government enacted the U.S.A. Patriot Act as an anti-terrorism measure shortly after Sept. 11, 2001. The U.S.A Patriot Act makes it easier for the FBI to gain access to records containing personal information in the U.S.,” she said.

In fact, the law allows U.S. authorities to compel the disclosure of information held in the U.S. by foreign and U.S. companies. The Patriot Act and related statutes give U.S. police and grand juries wide subpoena power, and allow investigators to slap gag orders on companies that have been ordered to hand over data.

“This is relevant to Canadians when Canadian companies outsource information management functions to U.S. firms. B.C. has responded by amending its Freedom of Information and Protection of Privacy Act. The amendments prevent public-sector institutions from storing personal information outside of Canada; prohibit public bodies and their service providers and suppliers from disclosing personal information outside of Canada and make it mandatory for them to report any foreign demand for such information that is not authorized by the B.C. Act.,” she said.

Both Ling and Wakulowsky expect the Ontario government to be confronted with the issue.

“Ontario has not yet introduced similar provisions, but Ontario companies have started to re-evaluate their own information-handling processes,” said Wakulowsky. “They are asking prospective vendors whether any information would be processed in the U.S. and they are taking steps to ensure information is processed only in Canada.”

The issue will be discussed at the federal level next year. Ottawa’s federal Personal Information Protection and Electronic Documents Act is due to be reviewed in 2006. Wakulowsky said the review gives the federal government has an opportunity to address the issues arising from the U.S. Patriot Act.

The federal Personal Information and Electronic Documents Act (PIPEDA) took effect in 2001. All businesses must now comply with the law.

Crouched for the kill

Early this month, Infosys Technologies board member Srinath Batni flew to China to kick off one of the company’s most significant new initiatives this year.

His mission: to sign letters of intent with Shanghai Zhangjiang Co. Ltd and the administrative commission of the Hangzhou Hi-Tech Development Industry Zone to set up two development centres.

The sprawling new facilities — expected to cost $65 million over the next five years — will ramp up the number of software engineers employed by Infy’s Chinese subsidiary from the current 250 to 6,000.

“China will be the second largest software hub for us, after India. Our aim is to recreate the same global delivery model in China that we have perfected in India,” says Batni.

Bangalore-based Infosys is not the only Indian infotech tiger crouched for the kill. Having stalked the elusive — and often frustrating — Chinese outsourcing dragon for the past four years, an entire pride of Indian software services and solutions providers is now hoping to gnaw a large chunk off China’s mouthwatering market.

From a mere $2 billion in offshore revenues this year (compared to India’s $17 billion), China is expected to pull in $27 billion from IT services (including call centres and back-office work) by 2007, according to Gartner, which predicts Indian companies will carve out 40 per cent of that figure.

Dual Strategy

China is being seen not just as an offshoring hub. Its domestic market is growing, too. Chinese companies will spend over $25 billion on information technology this year, and the market is growing at a rapid 30 per cent annually.

According to research house IDC, $9.4 billion will be spent on technology services alone in 2006, up from $3.74 billion in 2002. Little wonder Indian companies are hoping to use their Chinese operations to gain a domestic foothold.

Take Mumbai-based Tata Consultancy Services (TCS). The ink has barely dried on the agreement signed last month between TCS, Redmond (Wa.)-based Microsoft and a clutch of state-owned Chinese partners to set up a joint venture services company by early next year.

To be located in Beijing’s Zhongguancun Software Park, the new facility - in which TCS has a majority stake - will employ 1,000 engineers. That’s four times the existing strength at the infotech major’s three-year-old Global Delivery Centre at Hangzhou and Shanghai.

Girija Pande “Our aim is to create a role model for the Chinese IT industry and it will serve both the global as well as the Chinese market,” says Girija Pande, head of Asia-Pacific at TCS, which was awarded the prestigious project in the face of stiff competition by the Chinese government on the advice of IT consulting firm Gartner.

Hyderabad-based Satyam Computer Services has plans that are just as ambitious. Satyam has around 300 engineers, mostly Chinese, at its facilities in Shanghai and Dalian. With plans to set up a third development centre - probably at a university town in western China - the company hopes to multiply its workforce to 3,000 by 2007 and 5,000 by 2010.

Sailesh Shah Says Sailesh Shah, senior vice-president and director at Satyam : “The Chinese market is three to four times bigger than India. You have to be an early bird. Also, it is part of our company’s policy to globalise in non-English-speaking markets”.

Software education major NIIT, which has had a presence in China for almost a decade now, is using a different model to scale up: it is tying up with local universities and setting up education centres on their campuses.

Rajendra Pawar The Delhi-based company has already set up 25 such centres across China. Says NIIT chairman Rajendra Pawar: “Today, 50% of our business is from centres in universities and another 50% from centres which we run directly.”

Elusive Quarry

Others are more cautious. Bangalore-based Wipro Technologies, for instance, is sticking to the needs of its global customers who have a presence in China. It has only a small development centre consisting of 25 engineers, which could go up to 150.

Sudip Banerjee Says Sudip Banerjee, president of Wipro’s enterprise solutions division: “China is a big market. We have a skeletal presence and will see how it develops before we make more investments.”

Such caution is not unwarranted. Indian software companies have battled against language, culture and local regulations ever since they established a token presence in mainland China four years ago largely to service multinational clients or specific offshore requirements. Together, they employ less than 1,000 people and the contribution of Chinese subsidiaries to overall revenues is still minuscule.

That is now set to change very dramatically. One of the biggest advantages that Indian companies have is, of course, scale. China’s IT services market is highly fragmented, with half the 6,000 domestic firms employing less than 50 people. Indian subsidiaries and joint ventures, such as the one signed by TCS, hope to showcase the cost advantages of large-scale operations by creating additional hubs outside India.

“We partner with Chinese companies and bring in global solution expertise to modernise their business so that they become global players,” says Pande.

There’s another lure. Universities in the people’s republic now churn out 350,000 software engineers every year, significantly higher than the 250,000 from Indian campuses. That’s a large pool of talent which no IT services company hoping for a global presence can ignore.

According to Batni, it is now Infosys strategy to become a global company by setting up hubs in countries where the relevant skill sets are available.

Leveraging that burgeoning skill base, companies like Infosys are hoping to use their Chinese operations to service Japanese and Korean clients who have a cultural affinity with that country.

“Japanese companies are offshoring low level work in China. We provide high level IT services work by convincing them that we will offer them the same quality as in India,” says Batni.

Costly Campaign

But that quality doesn’t come cheap. Pande says that while entry-level Chinese programmers ($145 a month, inclusive of social security) are paid around the same as in India ($135 a month), project managers and senior staff are at least 10-12 per cent more expensive.

Wipro’s experience is similar: while programmers with three years experience can be hired at salaries which are 10 per cent lower than their Indian counterparts, supervisory staff is at least 25 per cent costlier. “You don’t go to China because it’s cheaper. That is a myth,” says Batni.

Cost is not the only problem. While entry-level programmers may be increasingly more abundant in China, engineers with project management skills, domain knowledge expertise, and professionals with more than five years experience are not easily available.

Associates with bilingual skills — Chinese and English — also command a premium. Attrition rates are much higher than in India as well. Says Banerjee: "Most Chinese IT professionals work for two or three years and then decide to set up shop by taking away clients."

Finding out about local entrepreneurial instincts the hard way is not the only lesson that Indian companies have had to learn. For instance, software services used to come bundled with hardware in China. So, most IT services were delivered by hardware vendors or resellers.

Pande says that Chinese companies are not used to paying for IT services separately. It is a difference which they had to understand before approaching domestic clients.

The communist giant also has a complicated legal structure, problems of repatriation, wide variations in policy and law in the provinces, and opaque infrastructure pricing (two units in the same software park might be charged two completely different rents for the same space).

Infy, for instance, had to wait over two years to enter China — its initial plan to set up a branch office was rejected. Finally, it decided to set up a fully-owned venture. With its newfound experience, Infosys now believes it is best to go it alone in China, even though it has been offered a joint venture with the government.

"We think a collaboration will not work as they are contradictory interests: one partner will want to reduce costs while we would like to maximise profits," says Batni.

China’s record on protecting intellectual property rights (IPRs) can also be a major stumbling block for companies looking to set up offshore hubs there.

Says Wipro’s Banerjee: "Many of our customers who have offshored work to us in India would be hesitant to take it to China because of IPR protection. It is an impediment as the laws are still not well developed."

Not everyone agrees. Batni argues that the Chinese government is making an extra effort to ensure that IPRs are protected.

As a result of these drawbacks and higher expenses - some of which, though, are offset by lower infrastructural costs such as telecommunications - several major Indian software companies are adopting a wait-and-watch attitude regarding China for the moment. One of them is Mumbai-based Patni Computer Systems.

"Virtually none of the Indian companies have been able to scale up in China. That’s because IT professionals are not available there and it makes no sense to move them from India," says Patni vice-president Deepak Khosla.

He may have a point. But companies like Infosys, Satyam, TCS and NIIT are obviously banking on the prospect of rapid growth — both in offshore work and in China’s domestic needs— and are making large investments in developing that country as a new hub. Clearly, these tigers don’t expect their long-awaited quarry to be hidden much longer.

Monday, August 22, 2005

‘Europe’s outsourcing growth will benefit India

According to the European Information Technology Observatory (EITO), outsourcing continues to be the fastest growing segment within the IT services in Europe. German companies outsourced services worth around euro 10 billion worldwide in 2003, a figure that is set to rise to euro 17 bn by 2008.

EITO vice-chairman Jorg Schomburg says this is good for countries like India which have a leadership position in outsourcing. However, he warns that although India continues to enjoy a significant competitive advantage over countries like China, Malaysia and the Czech Republic among others, these countries are beginning to take initiatives to close the gap.

Mr Schomburg was speaking at a curtain raiser on CeBIT 2006, the world’s largest trade fair for information and communications technology, to be held in Hannover, Germany from March 9-15, 2006. Nasscom figures show that the ITES-BPO industry in India grew at a CAGR of 56.4% during the 2000-05 period.

Outsourcing boosts economy: British official

Sydney: A top British industry official Sunday said developed countries should not worry over job losses to low-wage countries like India and China as off-shoring forces an economy upmarket to where the big rewards are.

Sir Digby Jones, director general of the Chamber of British Industry, said Britain had injected more than $27 billion into its economy since 2000 by sending unskilled jobs offshore to places like India and China.

Jones told Australian TV network Channel Nine that the British workforce had retrained and was now better skilled. This transformation had resulted in a more flexible labour market and lower unemployment.

"You've got somebody doing the work that is a commodity, send it away ... have the courage, don't protect the market, let it go," Jones said.

"Skill the person into value-added work, they earn more money so they stimulate the economy, they spend in the high street or they pay down their credit card debt."

He added that profitable companies paid more tax and that money could be spent on hospitals and schools.

Sunday, August 21, 2005

China Seeks a Piece of the IT Pie Through Outsourcing

China has many of the same attributes that have lured U.S. businesses to India: low wages and a large pool of talented, eager workers. A report released last month by global consultant McKinsey & Co. concluded that China was the second-best place for U.S. companies to send their IT work, after India.

China's IT industry is here, growing and eager for American business.

That was the message from Chinese government officials and information technology businessmen last Thursday at the 2005 China IT Service Summit, a two-day event organized by the International Executive Association.

Taking a cue from their country's ascent as manufacturer to the world, Chinese officials said their IT industry could provide opportunities for American businessmen and investors.
Cut Costs, Boost Profits

Chinese companies can provide healthy returns for investors and quality services for businessmen looking to cut IT costs by sending work abroad, Chinese officials said.

"U.S. outsourcing Latest News about Outsourcing to China will become big business," said Wuqiang Li, science and technology counselor for the Chinese Consulate in New York City. "The coming years will be the best period for U.S. investment."

About 100 people attended the two-day conference in lower Manhattan, many of them U.S. businessmen and investors looking to evaluate the risks and opportunities of entering the Chinese market.

Included were representatives of Deloitte & Touche, Merrill Lynch (NYSE: MER) Latest News about Merrill Lynch, Lehman Bros. and Morgan Stanley, as well as smaller investment companies.
'The Place to Be'

"Clearly there are opportunities," said Bernard Hutman, a portfolio manager for Platinum Partners, a New York-based hedge fund, who attended the conference to better understand the Chinese investment environment.

"For our generation, this is the place to be," he said.

China lags well behind India in the global market for IT work done overseas. Analysts say India holds about 90 percent of the world's outsourcing business, worth around US$20 billion. Chinese officials said their IT outsourcing industry earned $600 million in 2004, according to Walter Fang, an executive with Chinese outsourcer Neusoft Group.

Still, China has many of the same attributes that have lured U.S. businesses to India: low wages and a large pool of talented, eager workers. A report released last month by global consultant McKinsey & Co. concluded that China was the second-best place for U.S. companies to send their IT work, after India.
Establishing a Presence

The list of U.S. companies that already do IT work in China includes IBM (NYSE: IBM) Latest News about IBM and Motorola (NYSE: MOT) Latest News about Motorola, Chinese officials said. Teaneck, N.J.-based outsourcer Cognizant Technology Solutions, which has 70 percent of its employees in India, last year opened an office in Shanghai.

Jamie Popkin, an analyst for Gartner Latest News about Gartner Research, said China clearly has grand designs for its computer industry: it wants to make its mark in a variety of areas, including computer software Get your FREE Oracle Database Software Kit today!, hardware, semiconductors Latest News about semiconductors and programming services.

"It's a very ambitious goal," he said, noting only the United States could claim strength in all of those areas.

"That is a statement that should create competitive concerns among others in the industry."

Indeed, Chinese officials offered a wealth of statistics to support their contention that the industry in China is on the rise. It is growing 30 percent a year, they said, with about 700,000 IT workers and another prospective 200,000 in college.
Industry on the Move

The industry has 10,000 software companies and adds 1,000 to 2,000 each year, Chinese officials said. Popkin, however, noted that most of those companies have fewer than five employees.

Among the larger ones seeking to drum up business from U.S. companies at the conference was UFIDA Software Engineering, a Beijing-based firm.

"Definitely, we have a large talented pool of software experts in China," said Long Fang, an executive for UFIDA. With 5,000 employees, UFIDA has a client list that includes HP and Microsoft (Nasdaq: MSFT) Latest News about Microsoft, he said.

China offers companies a cheap alternative to India, he said. UFIDA can cut American IT costs by two-thirds and even undercut Indian companies by 20 percent to 30 percent, he said.

That's in part because a typical Chinese IT worker earns $700 to $800 a month, less than one-fifth what a U.S. worker would earn.

In addition, China allows American companies to diversify their services, he said.

"They don't want to put all their eggs in one basket," he said.

Saturday, August 20, 2005

Outsourcing remodels the supply chain

The global electronics supply chain is undergoing a fundamental transformation due to OEMs’ continued outsourcing to electronics manufacturing services (EMS) providers and original design manufacturers (ODMs), according to Jeffrey Wu at analyst firm iSuppli.

Wu, formerly with Taiwanese manufacturers BenQ, said: “Taiwanese manufacturers now...play a pivotal role and often stimulate changes in the electronics-manufacturing industry. Many OEMs now are taking back control of the purchasing of certain components from the EMS/ODM providers.”

“This trend is likely to continue, because OEMs increasingly believe this is the best way to resolve procurement problems arising between them and their contract manufacturers,” he said.

The EMS/ODM purchasing policy has been blamed both for driving down semiconductor prices because of their sheer purchasing power - around a third of all semiconductors purchased - and for obscuring the amount of inventory in the supply chain.

This has resulted in sudden, unexpected adjustments in the supply/demand balance, with severe consequences for manufacturers.

The lack of transparency on global supply chain inventory levels has recurrently plagued the semiconductor industry since 2001, and has been widely attributed to the unknown inventory levels of contract manufacturers.

“The rules of the EMS/ODM industry are being rewritten,” said Wu. “Contract manufacturers are devising ways to climb up the value chain to combat drastically-eroding margins, breaking down the conventional boundaries between EMS providers and ODMs. Contract manufacturers are expanding their global footprints to serve the OEMs in fast-growing emerging markets, a practice that increases operational complexity.”