Outsourcing and offshoring - consultants look to fill their boots

The economy remains in a slump, and that's exactly why Atul Vashistha is smiling. As CEO of NeoIT, a consulting firm that helps companies outsource some operations overseas, Vashistha has little trouble these days pitching the value of his company's services.

Last year, San Ramon, California-based NeoIT played a part in the signing of offshore outsourcing contracts worth more than $250m - of which it received a cut. In the first three months of this year, it worked on deals totalling more than $300m.

"We believe every company can [outsource] offshore," said Vashistha. "The question is, how much should you do?"

American businesses have long outsourced some operations to cut costs, most obviously in manufacturing, and the technology industry also has increasingly outsourced tasks such as applications development. More recently, many businesses have been engaged in process outsourcing, such as moving call centre operations offshore.

Low-wage workers are the key draw. The cost of an entry-level programmer in China, for example, is 30 to 50 per cent less than for one in Tokyo, London or Chicago, according to market analysis firm Forrester Research.

Forrester has estimated that the number of computer jobs moving overseas will grow from 27,171 in 2000 to a cumulative total of 472,632 by 2015. Forrester analysts predict that other services - including call centre services and back-office accounting - follow IT abroad.

But navigating the outsourcing waters abroad can be treacherous. How do you know whether you're getting a good price? Is the foreign company reputable? Will quality slip?

That's where companies such as NeoIT and Texas-based TPI, which focuses on outsourcing arrangements for clients such as JP Morgan Chase, Procter & Gamble and General Motors, come in.

According to TPI chief executive Dennis McGuire, about 30 per cent of the time that he works with companies, he advises them not to bother with an outsourcing deal in the first place. "We give an objective answer on whether or not they should outsource," he said.

McGuire's firm traditionally has worked on deals in which companies hooked up with a domestic-services provider. But in recent months, TPI has seen a dramatic shift toward clients looking to include an offshore component in their outsourcing deals.

The percentage of TPI's projects that involve some type of offshore arrangement climbed from 44 per cent in March to 52 per cent in April, McGuire said. TPI, which has a partnership with NeoIT in order to help it provide advice about offshore deals, saw its revenue jump about 38 per cent last year to $58m. TPI's sales are on pace to climb another 15 to 20 per cent this year, McGuire said.

Other companies are jumping on the bandwagon as well. Law firm Shaw Pittman has brought on business consultants to help it advise companies on outsourcing decisions. Armed with their expertise, the technology division of the law firm has seen its revenue rise from roughly $35m three years ago to about $45m last year, said Shaw Pittman attorney Robert Zahler.

"We've done this dozens of times," Zahler said. "We can help them do it more efficiently and know what the issues are."

Those issues include intellectual property protection and geopolitical-stability questions such as, for example, an outsourcer's backup plans in the event of war between India and Pakistan.

Another challenge for companies looking to ship IT-related work abroad is separating legitimate providers from rookie outfits. Mike Atwood, president of Dallas-based outsourcing consulting firm Everest Group, said companies may pitch themselves as offering a 'complete' financial services offering when they're currently prepared to handle accounts-payable services only.

"We do a lot of research into, 'Who are the players, what are their offerings, what's real and what's not real?'," Atwood said.

Atwood, whose staff has grown by 30 per cent this year amid a surge in offshore deals, said an Everest official has already taken three trips to India in 2003 to check out the legions of outsourcing companies there.

NeoIT's vice president for business development, Eugene Kublanov, recalls a case where a Chinese company described as a high-tech leader turned out to lack a website in English.

Still, although business is brisk, outsourcing consultants do face hurdles. One involves the difficulty of picking winners as consolidation shrinks the ranks of offshore providers.

Events that disrupt international travel, such as the spread of severe acute respiratory syndrome(SARS) that has curtailed visits to and from Asia, are another wild card.

"The moment a customer cancels a trip, you can automatically assume there's going to be a delay of four to eight weeks in the deal," NeoIT's Vashistha said.

A third obstacle is domestic in nature: the growing backlash by workers to offshore outsourcing. TPI's McGuire wonders what sorts of jobs will remain in the US as the offshore outsourcing trend continues. He expects the controversy over domestic job losses to grow in the next six to 12 months.

Companies will need to formulate answers for employees and the public about their plans, McGuire said, which suggests that the domestic threat to companies like his may actually create more work - in helping employers develop those answers. "If you don't have a strategy," he said, "you're in deep trouble."

Ed Frauenheim writes for CNET News.com.