The New World Order: Offshoring Today

Remember when offshoring was synonymous with wild cost reductions and exploding profits? Ten years ago, it was common to hear of companies slashing costs by opening offshore arms. Indeed, India-based solution providers including Cognizant and Tata have profited handsomely by offering U.S. companies offshore services at bargain prices. However, with recent reports of salaries increasing in countries such as India, the savings are more subtle. Yet companies are still sending certain tasks " like call centers and software development " offshore, and they are adding jobs, such as knowledge processing, to the mix as well.

Why? Today, it's not (just) about saving money. VARs are using offshore centers in India (expanding from Bangalore into more rural regions) as well as Latin America and China in an effort to establish a global presence for themselves and their customers in those countries. They are proceeding more deliberately, with their sights set on gaining a toehold on new markets and taking advantage of a ready, educated and eager workforce.

There is no question that offshoring is here to stay, but it is evolving. According to Plunkett Research, global outsourcing revenue this year will hit $450 billion; seven percent of that will comprise contracts worth more than $1 billion. But there is a change in the approach: new locations are under development, strategies are changing and different capabilities are being employed. With that comes the need to address new challenges -- such as increasing salaries -- as well as keep the old ones "- such as language barriers -- in check.

New Locations

The colossal potential of markets such as China and Latin America, as well as India, is not lost on solution providers. "It's important to understand the value of moving this business offshore," Paul Schmidt, partner and practice leader of application development and maintenance and global services delivery/advisory services at TPI, a sourcing advisory firm, says. "It's all about getting a toehold in emerging markets."

However, getting into those markets is not as simple as sending products overseas: Many local governments want " and require -- U.S. companies to have a real presence in these countries.

"Part of [the product's or services'] delivery has to be in that country," says Schmidt. "Governments like to see a business as part of the fabric of a country and see employment from within the local base."

Companies are viewing China and Latin America as expansions of their customer base, not just a way of getting product made inexpensively for export back to the United States. The ready-and-willing workforces in these countries are also the consumers.

"Some people in the U.S. speak from a blindered view. The U.S. is not the world's only consumer. That's kind of a parochial view," Schmidt says. "Companies are realizing that part of their delivery has to be within the country of origin."

So countries are looking to new geographies to expand their reach. Earlier this year, TCS, for example, opened its Mexico Global Development Center; the solution provider has more than 150 clients and in excess of than 5,000 professionals in 14 Latin American countries. The center is strategic for furthering its success in the United States as well as for forging new markets in Mexico and Latin America. China is also in the mix.

"Outsourcing in China is now pretty much accessible to everyone," says Dean Stevens, general manager, U.S., for Symbio Group. Symbio provides application development services from China. "Even before a company is even born, the founders are calling me because they know they need a presence in China. Right now, there are two of those [types of companies] we are working with. They say, 'We can't raise funding without articulating a global strategy, we need China and Northern Asia.'" Primarily, that's because investors want to see trim labor costs from the get-go, he adds.

Next: Different Strategies