Crain's New York Business – by Anita Jain
Sophistication of the work rises along with volume; decrying losses
Norman Weisfeld has been sold on the idea of using software developers in Russia to write programs for his Manhattan-based company for years.
His conversion came nearly a decade ago, when a local company specializing in software outsourcing, Eastern Europe's EPAM Systems, quoted him a price of $100,000 for work that an American firm had sworn would cost him $1.5 million.
Mr. Weisfeld, a partner in the holding company that controls hip-hop clothier FUBU, also insists that he didn't have to sacrifice anything in the way of quality to reap those savings. Far from it, he says. "Russian software is far superior to U.S.-built."
Outsourcing firms have seen a surge in business this year, thanks to companies such as FUBU. By shifting their clients' work into skilled hands in places like India, the Philippines or Russia, the outsourcers reckon they can reduce their clients' software development costs by at least 50%. They do it by employing technicians who charge $18 to $25 per hour, versus the $60 to $100 per hour charged in the United States.
Good jobs go
The New York area's outsourcing firms, including units of such blue-chip companies as IBM Corp. and Accenture Ltd., expect double-digit sales this year as corporate America tries to cut costs and maintain profit margins in a sluggish economy. They also expect to come under increasing fire for taking more high-paying jobs out of the country.
"You no longer have to sell the idea of offshore," says Gordon Coburn, chief financial officer of Cognizant Technology Solutions Corp., a firm that specializes in software outsourcing to India. "There is an awareness and an acceptance of using the offshore model for software development and maintenance."
Buoyed by that acceptance, Teaneck, N.J.-based Cognizant saw its revenues grow 60% in the first half of the year. They are expected to hit $354 million for 2003. That growth rate is double last year's already heady level. "A couple of years ago, companies just made the outsourcing, not the offshore, part of the decision," Mr. Coburn says.
Last year, U.S. companies sent $4 billion worth of software development and maintenance work overseas. This year, that total will be 30% higher, according to Forrester Research, a technology research firm.
To handle its share of that swelling volume, Cognizant, which ranks among the top five outsourcing players in the United States, has 70% of its 7,000-person staff in India. That country is estimated to account for nearly 90% of the offshore software market.
As the practice of moving tech work overseas has exploded in recent years, outsourcers' arrangements with their clients have matured quickly. Instead of just looking to firms such as Cognizant and EPAM for one-stop software development, clients now are more interested in forming relationships. Cognizant says 80% of its annual revenues come from customers, such as MetLife or Radio Shack, that it has been working with for at least a year.
But the success of outsourcing firms has produced howls of protest. With Forrester Research estimating that 472,000 computer industry jobs will be transferred overseas by 2015, critics say the U.S. economy will suffer.
"For reasons of national security and economic well-being, it's of utmost importance that high-tech jobs remain in this country," says Bruce Bernstein, president of the New York Software Industry Association.
He also charges that the cost savings are being exaggerated, and that many times clients are trading down in quality by moving work abroad.
These days though, such comments are rare. Instead, even some opponents of outsourcing are considering changing sides. Phil Friedman, chief executive of Manhattan-based computer software company Computer Generated Solutions, says the reliance on overseas software writers will ultimately damage the high-tech economy in the United States.
Nonetheless, he admits, "If the trend continues, I will be left with no option but to do the same thing myself, much as I don't like it."
For outsourcing companies like Cognizant, volume isn't the only thing that's rising. The sophistication of the work they are being asked to do overseas is on a similarly steep upward slope. Last year, for example, EPAM developed travel portal Lasvegas.com for the Las Vegas casinos Park Place Entertainment and Mandalay Resort Group.
"A couple of years ago, they wouldn't have done it offshore," says Arkadiy Dobkin, EPAM's founder and chief executive. "Offshore software development has become mature enough to attract projects like this."
Mr. Dobkin expects his sales to grow 50% to $15 million this year. Much of that optimism is based on work won recently from several new clients, an illustrious lot that includes such large businesses as CareFirst BlueCross BlueShield and Colgate-Palmolive.
EPAM also is benefiting from interest in sending work to places other than India, which some see as having become saturated as an offshore destination. "If everybody is going to India, competition for talent there is very, very tough, and retention is very difficult," says Mr. Dobkin, who forecasts that more work will flow to Eastern Europe in the future.
Mr. Weisfeld of FUBU agrees. In Russia, he says, "I get loyalty, continuity, education and price."
Copyright 2003, Crain Communications, Inc