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IT Offshoring: It's not Just for India Anymore

COMPUTERWORLD – by Patrick Thibodeau

India once got 80% of U.S. spending on offshore work; now it gets about 59%

Indian offshore firm Satyam Computer Services Ltd. is opening a 2,000-employee development center in Malaysia, a move that will substantially increase that country's small but growing IT services capability. The announcement, made last week by Satyam, also says something about the growing geographic diversity of the outsourcing industry.

Several years ago, India received about 80% of all U.S. offshore spending, but that percentage has since declined to about 59% as offshore development becomes more global, according to Frances Karamouzis, an analyst at Gartner Inc. U.S. firms now spend about $26 billion a year on offshore IT services outsourcing, she said.

The Philippines accounts for about 9% of the total spending by U.S. companies; Canada and Brazil receive about 8% each; Central and Eastern Europe, 7%; Mexico, 4%; and China, 3%.

"There will be an evening out of distribution across different countries," said Karamouzis, who believes that the motivation for doing so won't be based on a search for lower labor costs, but around the need for specific IT expertise as well as follow-the-sun delivery. "I think India is not going to be in the position to say, 'We can do everything,'" she said.

Other regions such as Eastern Europe are unlikely to rival India in size because they don't have the population — but they may appeal to companies seeking specific skills, said Karamouzis. One company that has had experience with Eastern European IT labor is CareFirst BlueCross BlueShield in Owings Mills, Md. It has been using EPAM Systems Inc., a Lawrenceville, N.J.-based company that primarily delivers offshore services from Russia and Eastern Europe. It has about 2,300 employees.

Maynard McAlpin, vice president for strategic planning at the insurer, said that many of EPAM's workers have engineering and science degrees, which he believes has added to the quality of the development work. "I used to think that any Java developer is a Java developer. But what I found is there is a huge difference between someone who is a developer and someone who does engineering," said McAlpin, who added that the developers have taken on some complex work. "We had some tricky things for them to figure out," he said.

Indian firms are responding to the trend by adding to their ability to deliver services from anywhere in the world. Satyam has had about 150 people working in Malaysia, and its development center will give it access to a labor market that has many skilled engineers with multilingual abilities, said Virender Aggarwal, a senior vice president and director at Satyam.

"We are essentially going because it's time to move on a new global delivery model, which is distributed and delivered from multiple locations," said Aggarwal, who said customers see this as a way to mitigate the risk of being located in one spot. The company has about 35,000 employees.

In September, Infosys Technologies Ltd. said it would double its staff in Czech Republic to 350 to serve its European customers. Tata Consultancy Services Ltd. (TCS) this week said it is creating a new site in Uruguay with 250 workers. The new TCS global delivery center in Uruguay will raise the company's total Latin American workforce to more than 3,500 employees out of a global workforce of 78,000 employees, the majority of which are in India, the company said.

India will remain the dominant location for offshore services, but it has also seen wage spikes and increasing concerns about education quality as the demand for IT employees rises. Even though IT offshore outsourcing work is spreading around the globe, the work that goes to India is still growing because of unyielding overall worldwide growth in IT services outsourcing.

Total IT services growth is expected to grow from $18 billion in 2004 to $52 billion by next year, Gartner estimates.