The new outsourcing

It's been almost a year since i looked at outsourcing, either on shore or off, and, as you might have guessed, things have changed.

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I spoke with Arkadiy Dobkin, CEO of Epam, an outsourced software services provider headquartered in New Jersey with development centers in Belarus, Hungary, and Russia. From Dobkin's perspective, the single biggest change is in customer expectations. A year ago, customers were primarily looking to cut costs. But Dobkin says that as customers have come to respect the quality of the work of developers in Eastern Europe and India, they have begun to outsource highly complex, mission-critical projects. Epam is building a complex portal for a major insurance company and a travel portal for online travel service.

Another change is the rapid growth of outsourcing demand from companies in Western Europe, who find in Eastern Europe a ready partner in relatively close proximity. The increased demand will result in a steady rise in fees. Dobkin says that an increase from $20 per hour to $35 per hour, per software engineer, is typical.

Besides application development and maintenance, the other growth area in outsourcing is BPO (business-process outsourcing). BPO typically covers back-office financial operations such as accounting, HR, supply chain, and call centers.

Bill Frech, vice president of Capgemini's BPO practice, agrees with Dobkin, saying that enterprises have begun looking at the nondollar benefits of BPO. They realize that outsourcing allows them to focus on their core competencies while leveraging BPO's best-practices capabilities. As recently as nine months ago this wasn't the case.

But another change is taking place. The two sides of outsourcing are coming together -- a trend that will ultimately impact customers.

Frech predicts that BPO will take precedence over, and ultimately drive, application outsourcing. Obviously, whenever a company outsources a business process such as accounting, an application is going to come with it.

Barry Mason, an IDC senior analyst of application outsourcing, sees things from a slightly different perspective. Mason believes that traditional IT outsourcers will use BPO to drive their application outsourcing business, rather than the other way around. "The application is the technology closest to the business process, and you can't disaggregate the two," Mason says.

In the past, applications and technology have not been closely tied to the business strategy. But because it is the business processes that execute the strategy, Mason says, companies looking for an outsourcing vendor must take a look at the larger picture. A vendor must be capable in both application and business-process outsourcing, because the two are so tightly integrated.

One thing that hasn't changed during the past year is the number of challenges facing companies that outsource -- governance being No. 1. Still, the trend toward outsourcing isn't slowing. As application and BPO services come together, we are already seeing the economies of scale capture the attention of some of the stateside professional services companies such as Accenture, Hewlett-Packard, and IBM. In the next several years, I predict that the maverick offshore service providers will slowly disappear in a snowstorm of U.S. dollars.

Will that bring increased stability? Higher prices? Slower turnaround? Let's wait a year and see.