IBM and Boeing Bring Work Closer to Home - Bad News for Outsourcing?

IBM recently announced the location of its two newest global service delivery centers and its choice was an eye-opener. Instead of Bangalore or Shanghai, Big Blue picked East Lansing, Michigan, and Dubuque, Iowa, according to Business Week. Michael Daniels, senior vice-president of IBM Global Technology Services, is quoted as saying that while the cost-competitiveness of East Lansing and Dubuque were factors in the company's decisions to locate there, salaries and other costs weren't the biggest factors.

The global slowdown and events in India have many Western firms rethinking their outsourcing plans. First the tragic terrorist attacks in Mumbai heightened tensions with rival Pakistan. Then in December, a well-publicized accounting scandal at Satyam (SAY), India's fourth-largest IT services company, in which the longtime chairman admitted to fraud that artificially inflated profits, has focused Western clients to think twice about relying too much on Indian, or for that matter, any foreign companies for outsourcing help.

Because of growing economic and political risks, many potential clients are holding tight. “It varies between different industries, and broadly speaking, Western firms are taking a wait-and-see attitude,” says James Wheeler, an expert on China's IT outsourcing industry for the past five years and currently an outsourcing consultant at CSO Group in Shanghai. “However, some industries like enterprise software, electronics, and more recently ecommerce, have begun viewing China as an attractive alternative to India.”

IBM’s Daniels says: "Low cost is a factor in any decision, but the critical thing for us was the access to skills and the willingness of the local universities to cooperate with us and add to their curricula."

After assessing 72 countries, IT research firm Gartner ranked India and China as the top destinations for offshoring services. Local government officials in Shanghai expect the city’s IT service and outsourcing industry to continue to grow 50 percent annually in the next three years despite the global financial crisis. Despite these claims, many Chinese services outsourcing businesses have seen a slowdown in the past two years and shed excess staff, say most industry experts, especially those that are oriented toward international customers.

But some industry insiders take a more upbeat view. “IT outsourcing is a relatively “recession-proof” industry,” argues Remi Vespa, vice president of market development at the Venus Software Corporation in Shanghai. “When economy is doing well, companies outsource to produce more, and during recessions, outsourcing is viewed as a way to keep the same production level while spending less.”

According to the Shanghai Daily, Microsoft's (MSFT) R&D and outsourcing budget will both grow in "double-digits" in 2009. “For a region like the Silicon Valley, I do not expect any significant decrease in IT outsourcing volume,” Vespa recently told me via email. “The local shortage of talents is a major driver for outsourcing, possibly almost as important as the cost savings.”

Offshoring, whether it involves IT or manufacturing, is difficult to do right. Boeing (BA), beset by repeated problems that have delayed commercial deliveries of its 787 Dreamliner into early 2010, is making plans to bring more work back in-house.

Stock position: None.

Comments

[Midas1:]

About time insourcing hit the stage again. Maybe companies are learning that when you attend to only your bottom line and not customer needs such as someone who speaks English, you affect your bottom line because people do not want to buy your product. (Not to mention that India is such a hotspot for terrorism right now.) If American companies want Americans to buy their products, then they had better start and maintain American hiring. Loyalty is a two-way street Corporate America!

Jan 23 09:28 AM

[biomedlives:]

Right on, Midas1!

American technological prowess is critical to our competitiveness and power in the world, and overseas technology centers don't do anything for that prowess.

Jan 23 11:28 AM

[fctjam:]

You can all get excited about this, but in the end, it won't make a difference.

Unless there is a major legal change, outsourcing is inevitable. When salaries in India are 1/5 of what they are in the US, it's a lost cause. Not only IBM will push it, but so will the customer, who will want the lower India/China rates IBM can provide. Yes, you can talk about the quality. yes, you can talk about the language. I hear you. I live with those every day (until I get replaces by someone in India). But the reality is, when customers look at the bottomline, they'll give up a lot of things to paying 5 times less.

So it's not that I don't share your views on the value of the work done in the US. I just don't share your optimism.

Jan 23 01:27 PM

[desicon:]

In addition why do one have to work when the new administration is going to cut tax (even when one does not pay any tax - read welfare). One more reason why outsourcing will continue.

Jan 23 01:49 PM

[Global_support:]

While some in the offshore support groups have the technical knowlege, generally speaking they don't have the customer or case handling skills. If the problem is not the standard or a known problem, they are like fish out of water. Also, while they are good at speaking common or learnt phrases, they get caught out very easily if the customer uses slang or has a thick American or British accents which they stuggle to understand. Big corporations are starting to realize that the bottom line is not always the number one consideration when support is concerned.

Jan 23 06:56 PM

[Javad:]

I am in IT field and never had good luck with outsourcing to India. We might pay low wages to Indian's but we end up spending more at the end, by loosing customers or hiring more people for the mistakes done by Indian outsourcing people. Here is an example our company outsourced our front end EDI to India. When our files came back we had so many errors that we had to higher more people to clean up our error queues because someone in India does not know, if Smith is a last name or first name. There is still a huge culture difference and people in India can't learn our culture in a short time. Bottom line big companies will bring back most of outsourcing back eventually. I know some large manage care companies that have already brought back most of the outsourcing back in US. Also India and Pakistan tension makes it the most unstable region right now.

Jan 24 12:24 PM

[Brahm:]

In this instance, Mr. Schwarz's analysis smacks of the kind of intellectualism which lacks balance and perspective. He alludes to Satyam's fraud as material for probable substantive reason for an American corporation for basing the location of its outsourcing needs to the US. He forgets that the executives of Satyam are sitting in jail even a week or two after disclosure of the fraud. The same fate is enjoyed also by a couple of the partners of the accounting firm of PWc who were responsible for overseeing the accounts for Satyam. If you follow me Mr. Schwarz, this a far cry from what would be the case in the US or a country in Europe. Get the point Mr. Schwarz? Do you know what Indian jail conditions are? No cots to sleep on, except on the hard floor. I will omit a few other gory details for you, hoping that you would sometime have the opportunity to find out more! No countrry club ambience such as those being decried by US executives sent up after long trials while enjoying American bail and justice. Do you know that Madoff and others caught under similar situations for much larger crimes in the US are still free even in their restricted home environment? Please re-think your views on risks for locating outsouricng enteprises vis-a-vis fraud, and come up with the proper views on deterrent issues.

Well, I hope you will also find out more about Indian justice and jails, and I look forward to more balanced pieces from you in future. For my part, I WOULD NOT WANT TO BE EVEN A RAT IN AN iNDIAN JAIL OR BE FACING UP TO SWIFT iNDIAN jUSTICE!.

Jan 24 04:35 PM

[HangingOnBy...:]

Even more scary is the fact that many of these high tech companies outsource software development, and never really know what is written into the code. Testing is done only on requested functionality from a specification perspective. Never know what else may be lurking in the systems that run this software. Systems such as those managing nuclear sites or that manage the national power grid. Something to think about.

Jan 25 11:28 PM