Think of it this way: If you have small or medium sized company that is developing a new type of software, you also have to pay your employees, hire them, provide HR services and also make sure your accounting is accurate. You can either hire employees to do that, or more likely, you outsource those to an accounting firm or an HR firm. Because an accounting firm as certain efficiencies, they can pay the bills and handle accounts receivable better and cheaper than you can. This way, all the people on your payroll are working to develop value to the company, rather than just operating a company.
Outsourcing some of your projects works on a similar principle. Why pay huge salaries when it can be done faster, cheaper elsewhere? This is way so many companies have found that they can send projects to companies located overseas and yet experience faster growth at home.
However, choosing the right partner overseas can be a troublesome task. So many countries now can outsource, where do you even begin to look? This is where Zipzone can help you.
Practical Considerations for Offshoring
The following comments are based upon a focus group discussion on various aspects of offshoring for IT Companies.
What is Offshoring and Outsourcing?
The terms outsourcing and offshoring are often used interchangeably. However, outsourcing typically refers to the practice of one company hiring another company to perform tasks that used to be done in-house. If that task is located in another country, it is sometimes referred to as international outsourcing.
The Bureau of Labor Statistics considers offshoring to be slightly different. Principally, it refers to the practice of replacing domestically supplied services with imported services. Typically, this results is the displacement of American workers in favor of foreign workers. For the purposes of this article, we will use to term outsourcing to refer to the all situations where IT companies are hiring the services of firms in foreign countries to do IT work abroad.
Who's doing it?
Outsourcing can be done by virtually any IT company, and can be done in most any countries, although there are strategic regions such as Vietnam where it is more prevalent. Most people have heard that there is a great deal of outsourcing done in India and Pakistan. Few IT firms that do principally federal government work do any outsourcing abroad; but there is some state government work being outsourced. Naturally, any firm that has substantial government interests must consider the politically sensitivity of displacing American workers.
The size of the company matters as well. Most companies with under $150 million in revenue don't consider doing it. However, more mid-sized companies are now taking the step. Even some small companies, with revenue as low as $5 million, are looking at those opportunities. They may need marketing help and are outsourcing that. State and local governments are even doing it. When budgets are squeezed, they go this route as well, such as Fairfax County.
The globalization of the economy has helped to push this trend towards offshoring. The US benefits by getting cheaper products and services in the market. About 90% of the Fortune 500 companies are doing it. Many are going to Canada. Voice work, such as call centers, are going to places like India and the Philippines, where English language skills are good. IBM and Accenture have good offshore outsourcing programs and they're mostly going to India. But most firms are focusing on where these is a talent pool and where they can establish a technological niche for themselves.
According to the US Department of Labor, offshoring in the IT sector occurs, but not to a great extent. Although research on the IT sector is limited, it nonetheless suggests that service outsourcing, though low, is steadily increasing. Estimates of the number of actual jobs outsourced in the IT sector range from 34,000 to 74,000 per year, out of an estimated total number of 4.5 million IT workers in the US.
Why did you first get into it?
Companies offshore to save money. They save money because labor is cheaper in many countries. The reason most firms are going has to do with the cost arbitrage and their ability to expand their talent pool.
Often, where they decide to offshore depends on contacts. For instance, one CEO is Vietnamese-American and had inside connection in Vietnam, and knew there would be lower costs for software development there. This company has some state clients, but mainly has private sector clients. For most firms, it's about location.
The number of dissatisfied clients that offshored is smaller now than in the past. Examples of good outsourcing arrangements are more plentiful and their stories are more visible. There are also more horror stories of what not to do.
Whether the business is large or small, the costs of resources are usually the same. Companies are looking for high skill workers in specific areas. Some large companies are taking a back step. IBM is re-outsourcing to other companies just because of the costs. There's lots of jumping around. The quality of the outsourcing team is key. The outsourcing team should be considered an extension of the company. The corporate values are as critical as the cost advantages. Building a knowledge base in these arrangements is expensive and there are wide gaps in quality.
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