Global IT outsourcing is an inexorable trend. A total of 826,540 IT jobs with a combined salary value of $51.6bn were exported by France, Germany, Hong Kong, Japan, the UK and the US in 2004, according to Frost and Sullivan, the market analysts.
Frost and Sullivan argue the trend is unstoppable because many suppliers in low cost regions provide higher quality services than companies can get at home. As a result offshore outsourcing or - as the new shorthand has it “offsourcing” - of IT jobs is regarded as necessary to survival.
But the offshore outsourcing model depends on low margin, high volume mega deals that are inappropriate for SMEs, and while there are some smaller, niche suppliers they rarely have the scale to pull through the full benefits, according to Neville Howard, partner in the consulting practice at Deloitte.
And he cautions SMEs to consider the number of outsourcing deals, both on and offshore, that fail to meet users’ expectations. “If this is the case when clients are large, sophisticated and well-resourced, it is bound to be worse for SMEs.”
SMEs also need to beware of being transfixed by the promise of lower staff costs and failing to take overheads into account, says Steve Baker, Head of Offshore at Troika, a financial services software company based in London.
He cites implementation costs of between £20,000 and £40,000 per head to move a call centre or back office process. “That is a daunting amount for a cost reduction of £10,000 to £15,000 per annum. You need big pockets to make the up front investment,” he says.
Meanwhile, Ronnie [Veronica] Sandham, chairman of SystemHost Ltd, a UK managed services company, argues that offshore outsourcing is not viable for SMEs because they cannot get a personal service.
Offshore outsourcing pushes large numbers of users onto a standard contract in order to deliver economies of scale, she says, “whereas what SMEs need is a relationship with the person on the phone; someone with a detailed knowledge of their business.”
However, services tailored to SMEs are becoming available, according to Mike Havard, managing director of the offshoring consultancy CM Insight. “Most attention has been on the big names, particularly in financial services, but a steady stream of smaller companies that are below the radar are moving work offshore.”
Nor is it the case that offshore suppliers are only interested in mega deals. “There are ways of getting software development, application maintenance and other services done effectively on a small scale. You don’t need to be a bank looking to move thousands of jobs, you can be looking to move dozens,” says Mr Havard.
As attention has shifted towards satisfying the SME market, intermediaries are springing up to ease the process of finding an offshore supplier and assisting with the transition. “There are plenty of people to hold your hand,” says Mr Havard.
In the UK the National Outsourcing Association (NOA) launched a special interest group on outsourcing and offshoring for SMEs recently. The support provided includes a how to guide and a mentoring scheme pairing interested SMEs with peers that have experience of outsourcing. Sanj Prabhakar, SME director of the NOA says SMEs have more to gain than their larger brethren from offshoring. “The availability, flexibility and scalability of skilled resources offshore is particularly valuable for smaller companies.”
Stuart Drew, Director of HCL Technologies, a leading Indian supplier of offshore IT services agrees. “There is no doubt the cost savings can be accessed by SMEs and offshoring can be used to drive new business.”
One example is MetaPack, a UK provider of supply chain order management software based in London. “The company has an in house IT department; the problem is top-up flexibility. Using our service they can turn on the tap project-by-project,” Mr Drew says.
Another customer, Guidewire Software of San Mateo, California, a recent start-up, avoided having to raise venture capital for IT systems. “The founders funded development of the claims management software from their own pockets but the question was how to pay for IT skills and equipment. We developed a joint marketing strategy that is fuelling innovation and helping Guidewire look bigger than they are,” says Mr Drew.
Indeed, offshoring is increasingly used as a technique not only to avoid fixed costs for start-ups but to create an international presence from day one. A recent study by PricewaterhouseCoopers shows US start-ups are using a variety of offshore skills from engineers to marketing staff, and some venture capitalists are demanding companies they fund have a strategy for holding down capital investment and staff costs by tapping offshore services.
This highlights how the range of offshore services is moving beyond the realms of IT and call centres, to skilled white collar functions serving professional firms such as lawyers, estate agents, architects, market analysts and accountants that in general all fit into the SME category. While the complacent rhetoric has it that low skill, menial jobs are exported enabling companies to reinvest in higher skills in their home markets, the term “knowledge offshoring” is creeping into the lexicon.
“It is now possible, through intermediaries, to buy graduate skills by the hour offshore, rather than employing a salaried body at home,” says CM Insight’s Mr Havard. “I know two law firms that have moved work offshore. The market is nascent, but there is huge opportunity for professional services companies to cut costs by moving high skill, white collar work offshore.”
Offshore legal services focused initially on clerical tasks such as document management, but services are now available for researching case histories and preparing briefs, along with intellectual property related services, for example, patent searching and management.
The gold rush to offshore outsourcing has its share of horror stories. Many of the problems arise because people look at offshoring only from the perspective of using it to drive out cost, and overlook the risk attached to uprooting a business process from the US or Europe, and moving it to India or the Philippines.
If SMEs do not believe they can get at the cost benefits of offshoring, the service they require is not available, or are too nervous to do so, they can opt for the growing number of managed IT services that are delivered by onshore suppliers.
For one off projects, such as software development, the general wisdom seems to be if you can specify it, you can get it done by third parties - whether in Birmingham, Bratislava or Bangalore is irrelevant. But SMEs looking for services need to be more cautious because they will have to manage the contractor over the longer term. The best advice is to opt for service providers that have a physical presence in the home market to provide a user-friendly veneer at the front end.
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