Finding Success Offshore

Fifteen years of research, books and articles have earned Mary Lacity, a professor of information systems at the University of Missouri–St. Louis, a reputation as a top expert on IT outsourcing. She says the current offshoring trend greatly resembles the domestic outsourcing frenzy of the early 1990s. CIO Insight Executive Editor Allan Alter spoke with Lacity about the value companies are finding in offshoring, and about the strategies they have followed.

CIO Insight: What is the value of offshore outsourcing?

Lacity: Most customers initially get excited about offshoring because of the favorable labor arbitrage. The Fortune 500 customers we interviewed were using offshore outsourcing for two main areas: developing new applications, and re-platforming old ones, such as changing from PeopleSoft to SAP. Then they discover their transaction costs are very high in the beginning, while conquering the learning curve, and they tend to shift their focus from just cost-saving, to the quality of the code and how fast the work can be done. It’s not until they have significant experience offshore that we see more strategic uses.

How many companies move from focusing on costs, to quality and strategy?

Almost all of them. Most were primarily using offshoring not to replace IT staff, but to address backlog and new projects they couldn’t do with their existing head count. One Fortune 500 financial services company originally went offshore because of Y2K. They now have relationships with 16 suppliers in Asia. They were able to ramp up very quickly when the mortgage refinancing boom came, and ramp down when refinancing diminished, without affecting their internal head count much.

How much work do you need to farm out to save money?

If you want total cost savings of 20 percent, and you’re talking about application development, then between 50 and 100 full-time employees. Call centers require a much smaller volume of work.

How do you decide where to go?

Most of the customers we talked to did not pick their destinations on IT criteria, but rather on where they already were or wanted to go. That’s great, because they can get the people who are already there to manage the relationship.

Besides India, in what other countries will CIOs choose to offshore?

The Philippines are going to be one of the next big locations, because they have 300,000 IT professionals. I wouldn’t discount Central and South America either, especially to provide Spanish-speaking call centers.

Is there any change in how executives think about offshore outsourcing?

I see so many parallels between the offshore outsourcing market today and the domestic outsourcing market of 15 years ago. Ten years from now offshoring is going to be as much of a nonissue as domestic outsourcing is today.

For the full interview, click here.

At a Glance:

Background: A former consultant and systems analyst, Dr. Mary C. Lacity is also a research affiliate at Oxford University’s Templeton College.

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