Offshore outsourcing: Unmapped territory
- By Diane Frank
- Jun 14, 2004
In certain circles, the word offshoring will start fights. Some know it as global sourcing and others simply call it outsourcing overseas. But whatever term is used, it is guaranteed to start a debate.
Such debates are raging in almost every state, with legislators introducing more than 120 bills during the past two years to discourage, limit or ban offshoring in state government contracts. Officials in all of those states are keeping a close eye on three bills that have become law since March, to see whether the restrictions harm government officials' ability to provide services.
Outsourcing has its supporters because it provides affordable access to expertise and resources not available in government. But it is a sensitive issue politically, especially at the state and local levels, because it involves sending jobs outside the United States at a time when many people here are looking for work.
"Jobs get to be a very personal issue to people," said Teresa Takai, chief information officer for Michigan.
Theoretically, sending one job overseas today might create many more jobs in the coming years by fueling the growth of U.S. companies. But state officials are dealing with those people who are without work in the interim. "It is reality with us; it is not perception alone," Takai said.
Economics and emotions
The upcoming elections have amplified the issue. Legislators in 37 of the 50 states have introduced some form of legislation to restrict offshoring, and in three of those states the governors have signed bills into laws, according to the National Foundation for American Policy.
"There really won't be much rational discussion this year," said Thom Rubel, vice president of government strategies at Meta Group Inc.
"Government hasn't looked at how this is changing the economy...and at [what officials need] to do in terms of analyzing it and not stopping it, but [instead they are] creating policies around it," Rubel said. "When you're dealing with the general public, I think economic issues are some of the toughest to deal with."
Many business analysts point out that in a global economy, it makes sense for companies to turn to sources abroad to lower the cost of making products, writing code or providing help-desk and similar services.
Cost is a major factor for information technology companies that are continually being pushed by the market and particularly the government to provide solutions at lower prices, said Greg Baroni, president of the global public sector at Unisys Corp. and chairman of the Information Technology Association of America's committee on global IT sourcing.
Many companies' officials are taking a closer look at what should or must be done within the United States, and what can be done overseas, said Steve Cooker, vice president and general manager of Internet Security Systems Inc. ISS officials look to the United States as the first option for development of new code and applications, but they believe that basic services, such as call centers, can be handled overseas at a much lower cost, he said.
Some IT companies, including integrator Ciber Inc., started providing services through offshore resources at the request of commercial customers, said Ed Burns, president of the company's state government solutions division.
Ciber officials never intended to use that model in the government market, but executives found that they had to because of the government's push for even lower costs in their contracts, Burns said.
However, cost isn't the only factor that companies examine, Rubel said.
Putting a call center in India could cost less than half of what it would cost to put that center in Indiana. But problems occur when citizens stop calling because they aren't comfortable with having their questions answered by someone who doesn't understand the day-to-day context of their situation. Then the decision to provide that service from an overseas location no longer makes sense, he said.
Despite all of the benefits to companies, and therefore the American economy in general, the current IT services offshoring debate faces an uphill battle because it is framed in the same picture as offshoring manufacturing jobs, said James Dillon, CIO for the state of New York.
This is similar to the situation in Michigan, which was hit hard when automotive jobs began going overseas, Takai said. The same people are not being affected by the loss of IT jobs, but citizens find it hard to separate the current situation from the past, she said.
One way to raise the level of debate is to educate lawmakers, said Richard Thompson, Maine's CIO.
Many of the members of the state's House and Senate have called him looking for definitions of offshoring vs. outsourcing, in attempts to understand the terms, Thompson said.
But CIOs need to get out there and gather many more details, he said. Given the state of the budget in most areas, cost and efficiency have to be part of any decision about IT services, he said.
In some states, the offshoring issue is getting caught up in other problems. Massachusetts lawmakers put severe restrictions on any outsourcing or privatization back in 1993, said Peter Quinn, the state's CIO.
The state's revenue is so flat now that officials need to try something new to provide the level of service citizens want, but there is no way to find out if offshoring could be that deciding factor, Quinn said. "I think we're in a death spiral," he added.
Even if they were allowed to award contracts that include IT services provided overseas, state officials might not always choose to do so. It is hard enough to calculate the full cost of providing a service when it is coming from the same state or even the same country, but it is very hard to understand the total cost of managing an offshore service, Takai said.
Some companies are better at it than others simply because they have been doing it longer, she said. But it is not a mature process, and when company officials are still figuring out how it works, it makes it even more difficult for government employees to oversee that contractor, Takai said.
Many of the resources that have become available during the past few years that focus on program management in government and industry, such as the Program Management Institute Inc., can help with this, Baroni said.
Companies are also putting their offshore processes through the Carnegie Mellon University Software Engineering Institute's Capability Maturity Models, which measure the effectiveness of a company's management processes, he said.
Eventually, some companies may decide that the difficulty of managing offshore services makes it a poor strategy, Rubel said.
If a company's officials find that they are not any good at managing an overseas unit — that it's too expensive or it causes customer service problems — they will stop, because it is no longer something that makes business sense. Companies "need to have this experience to see what's going to happen," he said.
Because so many costs are still unknown, it is almost impossible to judge the impact offshoring will have on IT contracts, CIOs said. Many states, including New York and Michigan, have avoided signing contracts with offshore components.
In the end, it may come down to a wait-and-watch situation, Rubel said. Until states can show that laws restricting offshoring have a positive or negative impact, the debate will continue, he added.