Outsourcing: Beyond Bangalore

December 11, 2006 by Rachael King From Businessweek.com

Intellectual Property Issues

Dalian's labor costs are lower than in Japan, so it's become a center for application development for Japanese companies. U.S. firms outsource some technology work there as well. General Electric (GE) and Nissan (NSANF) outsource work to Genpact's operations in Dalian. Genpact was the first outsourcing firm to locate in the city in June, 2000. Accenture and IBM Global Services have since moved in.

There are certainly challenges for companies that wish to outsource to China, including the potential theft of intellectual property. To combat this, Infosys Technologies has disabled USB drives on PCs to limit the ability of workers to take data out of the office. "We've taken extraordinary efforts to protect the intellectual property of our clients," says Stephen Pratt, CEO Infosys Consulting, a subsidiary of Infosys Technologies, which has operations in Shanghai.

For U.S. companies that need to collaborate closely with offshore workers, South America is an attractive option because the time zones are similar and the infrastructure is strong (see BusinessWeek.com, 1/30/06, "Can Latin America Challenge India?").

Infrastructure Counts

Brazil boasts a mature software and IT industry, and the nation's providers such as Politec, Stefanini IT, and ActMinds are keen to do more offshore business. Stefanini, which has served clients such as Whirlpool (WHR) and Johnson & Johnson (JNJ), derives about 20% of its revenue from international operations, but the company would like to expand that to 50% by 2008.

Total Brazilian software and IT services revenue is $17.16 billion, while revenue from offshore software development is a much smaller $205.3 million, according to Brazil IT, an association of Brazilian IT services providers. "If we can get a client interested enough that they will go to Brazil, they will do business with us," says Eric Olsson, principal consultant with Politec, which has done work for clients such as insurer MetLife (MET), software colossus Microsoft (MSFT), and SAIC (SAI), a provider of a host of scientific and engineering services. Companies are drawn to Brazil's modern infrastructure, with airports and highways that are first world, says Olsson, whose company is the largest IT services provider in Brazil.

Good roads and the developers who drive on them don't come cheap, though. A software engineer in Brazil costs $20 to $35 per hour. That's lower than in the U.S. but pricier than in India.

Threat to U.S. Workers

And while a technically skilled global labor force is a boon to companies, the picture isn't so rosy for U.S. workers. Instead of competing with just India, now U.S. IT workers will need to go up against workers all over the world. In 2005, about 24% of North American companies used offshore providers to meet some of their software needs, according to Forrester Research (FORR). Over the next five years, spending on offshore IT services is set to increase at a compound annual growth rate of 18%, according to IDC.

The effect in the U.S. is that starting salaries in the engineering field—when adjusted for inflation—have stayed constant or decreased in the past five years or so, says Vivek Wadhwa, executive in residence at Duke University. "It doesn't make much sense to get into programming anymore," says Wadhwa, who worries that a lack of talent in certain industries, such as telecom, along with the outsourcing of research and development will erode U.S. competitiveness (see BusinessWeek.com, 11/7/06, "The Real Problem with Outsourcing"). But U.S. companies say that hiring programmers in India, who might make a fifth of what programmers do in the U.S., allows the companies to survive in a globally competitive economy.

After traveling the world, Ping Identity's Wood finally settled on Luxoft, an outsourcing provider based in Moscow that has served high-profile clients such as Boeing (BA), Citigroup's (C) Citibank, and Dell (DELL). While programmers are typically 20% more expensive in Moscow than in Bangalore, Wood found that there wasn't much difference in the hourly rate for the kind of work that he needed. "Indian companies are cheap until you ask for people with experience, and we wanted workers with eight years or more of experience," he says.

Russia's high-end software developers are drawing plenty of offshore business to Moscow and St. Petersburg, which together account for about 60% of the country's software development exports. Those exports have grown from $352 million in 2002 to nearly $1 billion in 2005, according to RUSSOFT, an association of software development firms from Russia, Belarus, and Ukraine (see BusinessWeek.com, 1/30/06, "From Russia with Technology?"). Providers EPAM and Luxoft are starting to gain some international recognition as well, both making Brown & Wilson's Top 50 Best Managed Global Outsourcing Vendors for the first time in 2006.

For Wood, the biggest benefit of working with Luxoft is a cultural one. "One of the reasons we're in Russia is that we found a common value set. Their work ethic is strong, and these people are very outspoken," says Wood. He says engineers in Moscow have no trouble proposing a different course of action when necessary. He says he found workers in Bangalore to be reticent. And since Russian developers stick around longer—turnover is now in the low teens—Wood has plenty of time to take those opinions to heart.

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