Outsourcing moves closer to home

Offshore service providers are moving some operations back to the U.S. in an effort to increase their appeal to U.S. companies

As stories circulate about the cultural barriers U.S. companies hit when outsourcing IT to locations in India, offshore service providers are moving some operations back into the United States -- an effort they hope will increase their appeal to U.S. companies.

Indian service providers, once considered the darlings of the outsourcing industry, today face challenges causing U.S. clients to question the benefit of sending work overseas. Also, as the value of the U.S. dollar drops in relation to the Indian rupee, some offshore providers feel compelled to raise prices, which negates the cost savings U.S. companies expect when offshoring IT work to India. And if smaller India-based offshore providers hope to compete with the IBM Global Services and Accentures of the industry, they must build global service delivery centers and expand their reach beyond their own geographic region.

"While it is less expensive than operating solely in the U.S., the cost of doing business in India has become more onerous because the demand for talent there is so high now that workers want more money and staff turnover has increased," says Mindy Blodgett, research analyst at Yankee Group. "It is also better [public relations] for a U.S. company to be able to say, 'We are outsourcing, but not offshoring.'"

For instance, security appliance maker WatchGuard terminated its offshore contract for services in India with an unnamed provider due to staff attrition and customer service complaints. At the time WatchGuard Director of Global Technical Services Bill Foreman reported that frequent customer complaints drove the decision to move the staff located in India to another location, potentially "stateside or in the Philippines."

Foreman attributed the problems he experienced with high staff turnover as well as an increase in jobs for Indian workers at U.S.-based companies such as IBM. "The attrition there was uncontrollable and we also had issues with the quality of staff available to us. Add onto that customer complaints and language barriers and the situation becomes a time and resources drain," he said.

Despite the cost increase WatchGuard will inevitably incur by locating those positions back in the United States or in the Philippines, Foreman said the company and its customers will benefit long-term. "We want to maintain our customer loyalty. The India support is not what our customers have come to expect for mission-critical equipment," Foreman said.

In response to such scenarios, India-based offshore providers are establishing facilities in more diverse geographic regions. For instance, Wipro, India's third-largest outsourcer behind Tata Consultancy Services (TCS) and Infosys Technologies, in 2007 set up its first U.S., or onshore, development center in Altanta, and also established a near-shore location in Monterrey, Mexico.

"TPI has seen an increase in nearshoring and onshoring by Indian offshore providers as well as global service providers like IBM," says Paul Schmidt, partner and practice leader at global sourcing advisory firm TPI. Among the drivers for locating facilities closer to U.S. borders is a more mature client base looking for alternatives to India and hoping to invest in outsourcing contracts in locations "with a greater cultural affinity with the U.S.," he adds.

"Mexico is a location that understands more about how business is done in the U.S. That culture has a greater understanding of U.S. society than the Indian counterpart does," Schmidt says.

Mumbai-based Hexaware has also selected Mexico for a nearshore location. The company says such locations "allow us to be more responsive to client needs for our niche competencies. Favorable factors such as proximity, a similar time zone with North America and the availability of local talent enable us to offer better value to our clients."

And the nearshoring trend is not unique to the United States. Indian service providers are also looking to establish service centers in Eastern Europe, which could provide the cost benefits as well as overcomes language barriers, for customers in the United Kingdom, France, Germany and other European countries.

"We are constantly evaluating the addition of new locations around the world that will enable us to better serve them," says Shami Khorana, president of HCL America, a division of HCL Technologies in India. "At present, we are the largest Indian employer in Northern Ireland and have recently set up a software development center in Poland. Our China operations commenced in September, and we are evaluating opening other development centers in other parts of the world."

But industry watchers warn U.S. companies that the technical and cultural issues that crop up with Indian offshore providers will remain even if the companies decide to build facilities closer to North America.

"Skills such as project management or identity and access management will never go offshore or even nearshore because of the cultural differences. Indian workers are trained very differently than American workers, even if it is with the same skill sets," says Jeff Northrup, CEO of IT consulting and staffing firm Concord Technology that specializes in global team development. "Because Indian companies will most likely send Indian managers to those locations, I can't see nearshoring fixing the cultural problems inherent in offshoring."

And the creation of outsourcing facilities closer to home doesn't mean U.S. companies will stop sending work overseas to India. More likely, U.S. clients will engage in blended contracts in which the customer-facing processes or services are outsourced to a nearshore location while back-office functions continue to be sent to India-based facilities.

"Indian providers are going to be able to offer a nearshore location in addition to the Indian location," TPI's Schmidt says. "Enterprise companies will be putting a fair amount of thought into which processes they locate where based on the skills available in that location and the customer touch points."

The IDG News Service contributed to this report.

This story, "Outsourcing moves closer to home" was originally published by Network World.

Copyright © 2007 IDG Communications, Inc.