SearchCIO.com Magazine, May 4, 2004
http://searchcio.techtarget.com/qna/0,289202,sid19_gci962636,00.html

Gartner picks best offshore destinations

By Karen Guglielmo, Editor

According to Gartner research, 5% of IT jobs have gone overseas, and 25% will be "offshored" by 2010. Global sourcing is inevitable and Gartner analysts are encouraging CIOs to embrace this trend rather than resist it. However, there is a negative side to offshore outsourcing. A good percentage of American IT workers will be laid off as their jobs are shipped to countries like India and China. But according to recent Gartner reports, U.S. companies will create new jobs by opening up their own IT operations overseas. This could ultimately avoid additional layoffs in the U.S., by starting new IT programs in other countries.

So what are the realities of offshore outsourcing? Roger Cox, managing vice president of the Gartner Strategic Sourcing Practice, spoke with SearchCIO about the best countries to outsource to and the obstacles U.S. companies must overcome to successfully implement an offshore outsourcing program.

Where are the offshore outsourcing hot spots today, and why are they hot?
Roger Cox: India is way ahead right now and China is up and coming. One of the reasons that Indian companies are doing so well in the offshore space is because they are being creative. Some of the Indian companies are actually moving their operations into China and developing their back office capabilities there. At the same time some Indian companies are targeting other countries that have relationships with mainland Europe.
China falls down a little on the list due to infrastructure, language and cultural compatibility. But China is addressing some of these obstacles, such as language barriers. A little statistic from the Chinese government shows that there are more people learning English in China than there are people in America.

Other than India and China, what other countries are actively participating in the offshore outsourcing market? And what obstacles do they need to overcome to compete with India and China?
Cox: A range of countries are involved in offshore outsourcing. The big ones on our [Gartner] radar are India, China, Israel, South Africa, Northern Ireland, Southern Ireland, Czech Republic, Poland, Hungary and Russia. We evaluate each of these countries based on language compatibility, government support, infrastructure, educational system, cost, labor, political stability, cultural compatibility and security. I'll give you a quick break down of the main issues each of these countries face in the offshore market.
In Israel, political stability is an issue. South Africa is doing pretty well. However, they don't have solid government backing. Northern Ireland has been around a while in the offshore outsourcing world. And Southern Ireland is pretty much the same. In the Czech Republic, there are language issues and no strong government support. Poland has language issues. Hungary has language and infrastructure issues. Russia is definitely up and coming. Russia has even developed an equivalent to India's NASSCOM (a nonprofit group formed to support and promote India's growing IT segment.) However, Russia does have some issues, such as language, infrastructure and security. Government support is also an issue in Russia. However, out of all the countries, government support in Russia is very close. Russia will definitely be a force to reckon with.

Are there risks to not having an offshore outsourcing strategy?
Cox: Every company should consider it [offshore outsourcing]. It's global sourcing. We've become a global market. If they [U.S. companies] don't, they could be damaging their local viability. Ultimately, it should lead to overall growth. A move to global sourcing is inevitable. It happened elsewhere; it's been happening for years.

You say that every company should consider offshore options -- whether it means running their own offshore facility or handing off IT services to an outsourcer. Can you cite any major U.S. companies that are currently having success at setting up and managing their own offshore facilities?
Cox: There are many. According a BusinessWorld article published in March 2000, General Electric (GE) adopted an outsourcing rule of thumb called "70:70:70." This approach was that 70% of GE's work would be outsourced. Of this amount, 70% would be done in offshore development centers. And of this amount, about 70% would be done in India. This ultimately would result in about 30% of GE's work being sourced in India.
Other companies doing this include AOL, Citibank and Amex. Many of the main IT service providers (Accenture, EDS, IBM, CGE&Y, Xansa, Unisys, Sapient etc.) all have, or are building up, offshore capabilities.

In a recent article you were quoted as saying that 2004 will see the first major offshore outsourcing failure that will lead to a company taking its operations back onshore. Can you elaborate on this?
Cox: This doesn't necessarily reflect the bigger picture, but has more to do with the politics of offshoring, which will see the backlash against white-collar job loss continue during the year. It [offshore outsourcing] is politically sensitive right now and all over the media. All outsourcing deals are perceived to fail. Any deal that happens to fail will be highlighted in the media. There will be a lot of pressure on business and IT executives to quickly respond to these issues or glitches.

What would you say are the main reasons companies will fail at offshore outsourcing?
Cox: Let's define 'fail' first. Gartner research has defined four factors that define 'a good deal' -- alignment and vision, contract and relationship, customer satisfaction, and service level and pricing. The combination of these four factors, and the relative importance assigned to each, represent a set of common goals for business units, the customer's internal team and the service provider.
A long-running study has shown that a deal is considered to be 'good' when the aggregated weighted score across these four areas was over 3.5 (on scale of 1 to 5). Deals considered to be really "failing" had scores of less than 2.5.
Common reasons for failure are primarily the same as those for 'onshore' -- with the added complications of security, culture, language and time zones -- these provide a new context for the program and the extra need for clarity and experience.

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