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ShareFuturists have envisioned 'virtual' US corporations since the 1980s. And, for the most part, US firms have vigorously outsourced the management of IT systems to far-off India and China. But a new survey throws up startling news: the offshore option is losing its sheen for US technology firms, who say they are more likely to get the job done in America.
The recession has thrown offshore outsourcing into convulsions. "US firms are diligent in conserving cash and are less likely to make long-term strategic investments in offshore infrastructure during this recession and especially if the recession deepens," said Don Jones, partner in the technology practice of BDO Seidman, the seventh largest US accounting and consulting firm.
BDO Seidman's survey finds US technology managers picking America as an outsourcing location this year over India and China. The survey sifts through interviews with the chief financial officers of US technology companies in the software, hardware, telecommunications, and internet space.
At least a hundred firms with revenues of $30 billion were asked about their outsourcing plans in 2009. The survey forecasts a decline in international outsourcing this year with 22% of managers leaning towards the United States in 2009, compared with 16% supporting outsourcing to China and just 13% to India.
Jones, who has 17 years of experience in advising Fortune 500 clients on tax and international outsourcing, talked to DNA in New York about how unexpected costs, the Satyam fraud, and the terror attacks in Mumbai have cast a long shadow on outsourcing to India. Excerpts:
The survey found that tech firms are picking the US as an outsourcing location over China and India. Is this a paradigm shift from your findings in previous years?
Since last year, CFOs in the technology industry have seen a decline in outsourcing to Southeast Asia, including the Philippines, as well as outsourcing to China. According to the survey, the US is the most popular destination under consideration for new outsourcing arrangements.
What's prompting US tech firms to pull out of traditional outsourcing destinations such as India?
This year, we are seeing three global factors that are causing US technology companies to pull back from traditional outsourcing locations, led by the recent boom and bust of the worldwide economy. The Satyam fraud case and the terrorist attacks in Mumbai are causing a lot of companies to reconsider operating in India. Supply chain and shipping cost issues in China are also negatively affecting the attractiveness of outsourcing technology operations to the Far East.
Some of the jobs that are still likely to be shipped to places like India...
US firms are likely to retain their current offshore outsourcing arrangements that require substantial costs to implement, like R&D and manufacturing. The trend will be to continue moving functions that will realise positive return on investments more quickly, such as IT services and call centres.
According to the BDO Seidman 2009 Technology Outlook Survey, of those outsourcing, the most common functions being offshored currently are manufacturing (54%), IT services and programming (46%), research and development (35%), distribution (35%), and call centres (35%).
If the recession deepens, will US tech firms outsource more jobs to overseas destinations to pare costs? If you move a call centre offshore to a place like India, once you have set it up on a run-rate basis, wouldn't you save 50% to 60%?
US firms are diligent in conserving cash and are less likely to make long-term strategic investments in offshore infrastructure during this recession and especially if this recession deepens.
What are the biggest outsourcing destinations? Can one country knock India off the top or do you think it will be a lot of small countries?
Recent changes in tax laws, the aggressiveness of India's tax authorities, and political unrest are big reasons US companies are considering other foreign outsourcing destinations such as China, Southeast Asia, and Eastern Europe. According to the survey, the most common non-US locations for outsourcing are India (50%), Southeast Asia, including the Philippines (31%, down from 50% in 2008), China (19%, down from 46% in 2008), and Western Europe (19%).
When asked what one location they might consider for outsourcing in the future, the CFOs most frequently cite the US (22%), followed by China (16%), India (13%), Southeast Asia including the Philippines (7%), Latin America (7%), Western Europe (6%), Canada (5%), and Eastern Europe (3%).
