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December 1 - 7, 2000
U.S. companies outsource to IT powerhouse
By Ron Chepesiuk
When the Gupta family goes to sleep in Virginia, more than 1,100 of their employees wake up to go work in a country thats 12 time zones away. Rakesh, Anita and Neal Gupta are Indian American owners of TechBook, a Fairfax, Va.-based company that helps clients distribute content over the Internet. Their employees software programmers, coders and support staff work from the companys plant located in Delhi, India. The Delhi Model, as TechBook executives like to call it, has been in operation since 1988.
Its the key to our success, said Tom Cunningham, TechBooks CEO. The Indian talent weve recruited has saved us money and helped us grow.
TechBook pioneered what has become a major trend in the American business scene. U.S. companies from dot-com startups to multinationals are turning to Asian countries, such as India, Singapore, Korea and the Philippines, for information technology (IT) workers. This past September, for example, Amazon.com announced its investment in a New Delhi startup Daksh.com to provide 24-hour customer service.
Reaching $51 billion in 1998, the industry of outsourcing business services is expected to grow to $81 billion in 2003, according to International Data Group in Farmington, Mass. While many countries are providing high-tech services to the global market, India, no doubt, has become the major player. Indeed, the National Association of Software and Service Companies reported that the country exports software and related services to nearly 95 countries worldwide, with about 62 percent of that total going to North America. Moreover, Indias National Taskforce on Software and IT Development estimates that more than 160 Fortune 500 companies are using Indian outsourcers. Smaller companies have followed the trend, as well.
1) Reduces and controls operating costs 2) Gets access to world-class resources and capabilities 3) Improves the companys focus 4) Shares risks 5) Eliminates cost of training internal staff 6) Meets tight deadlines by taking advantage of time zone differences 7) Infuses cash 8) Frees resources for other purposes 9) Makes capital funds available 10) Provides resources not available internally
1) Reduces and controls operating costs
2) Gets access to world-class resources and capabilities
3) Improves the companys focus
4) Shares risks
5) Eliminates cost of training internal staff
6) Meets tight deadlines by taking advantage of time zone differences
7) Infuses cash
8) Frees resources for other purposes
9) Makes capital funds available
10) Provides resources not available internally
Many factors are driving the shift toward outsourcing: an improved global technical infrastructure, new molecular software languages like Java and the emergence of virtual exchanges, such as HotBrain, eLance, Guru.com and webPRN, which have intensified the global search for IT talent.
Technology has made it practical for our company to outsource, Cunningham explained. The product we deliver involves the movement of very little freight, and the information we deliver back and forth from India is captured electronically and transmitted via satellite.
Plautz has used the virtual exchange eLance to hire programmers from India, as well as Russia and New Zealand. Venture capitalists have realized the vital role that virtual exchanges can play. Last year, for example, they poured $3.5 million into the Santa Clara, Calif.-based Hellobrain. In its first 11 months of operation, Hellobrain signed up 17,000 freelancers, 10,000 of them from countries outside the United States, including India.
Last September San-Francisco-based Guru.com announced that it had raised $44 million from several investors, including American Express, Texas Pacific Group and Credit Suisse FirstBoston.
We are in the middle of a real economic shift in the way people are working, and theres a huge opportunity to create a very valuable company in the middle of that movement, said Guru.com co-founder Jon Slavet. Guru.com announced that it has signed up 300,000 freelancers and 50,000 hiring companies.
With a worldwide shortage of IT professionals 850,000 in the U.S. market, 600,000 in Western Europe and 200,000 in Japan the outsourcing model is expected to become even more prevalent.
As the world gets more IT savvy, the United States will have to function in an increasingly competitive environment to fill the shortage, said Ron Victor, president and CEO of Homeland Networks Corporation, which delivers audio and voice streaming content to Asian communities worldwide. Victors company has a production facility in Bombay, India, where local IT professionals help develop much of its software.
INDIA AT THE TOP OF THE GAME
Indias language, educational system and training programs have helped transform the country into an outsourcing superpower.
Indian industry officials estimate that more than 4 million technical workers in their country speak English. Victor believes that fluent command of English has given India a tremendous advantage in the outsourcing arena over other developing countries. China and India has the same level of talent, but India has become a bigger outsourcing center because there are no communication barriers, he explained. Information and notes can be exchanged in English.
Furthermore, despite its status as a Third World country, India already has an excellent educational system. You cant believe how seriously young people in India take their education, said Indian American Himesh Patel, whose company Innhanse, an Orlando, Fla.-based company serving the hospitality industry, outsources software programming to India. Its not unusual for many of them to have multiple degrees in engineering, computer science and business.
Furthermore, Indias work force is known internationally for its entrepreneurial spirit and a burning desire to succeed, said Patel.
A WIN-WIN SITUATION
Outsourcing benefits both U.S. companies and Indian IT professionals. For example, the trend is helping to relieve Indias critical IT worker shortage. This year an Indian government task force estimated that the country would have only 120,000 software professionals, but the demand would reach 180,000. That labor crunch could tempt 100,000 software engineers to go abroad in the next five years, according to Indias National Association of Software and Service Companies.
With outsourcing, however, Indian IT professionals dont have to uproot themselves. They can earn a salary that while not close to what their U.S. counterparts earn, still gives them a comfortable living. Many U.S. companies even sweeten job offers with perks free cars, apartments and payment for their childrens education. Even with those bonuses the cost of hiring Indian professionals doesnt come close to what it takes to pay U.S. workers with equivalent qualifications, said Patel of Inhanse.
For example, Zubir Talib, the chief technology officer for i411, an 11-employee startup in Chantilly, Va., estimated that with outsourcing his company achieved a cost savings of about 25 percent. During the past two years, i411 has collaborated with teams of programmers in India to develop tools to distribute and filter content on wireless networks.
At TechBook the costs for outsourcing are 1/20 of what it would be to do the same work in United States, according to Cunningham. If a U.S. company outsources and isnt doing it in Delhi, it isnt taking advantage of all the available outsourcing opportunities, explained the CEO.
Undoubtedly, costs will rise as Indias economy grows, and this could pose challenges for companies wanting to establish a base there. Reuters recently reported that more than 20 Indian companies were planning to offer their shares on the U.S. stock exchange by the end of 2001. Two years ago, there were no Indian business listed on the stock exchange.
When outsourcing to a country 12 time zones away, an Asian American company will need to have good business sense. Its important to check out references and reputation and to get somebody in India to look over the contract. The business should also make sure that management at the Indian outpost is familiar with how business functions in the United States. Moreover, given the possibility for misunderstanding, the company should provide the details of outsourced projects.
If I tell the Indian partner that I want a cool Web site, it can mean a million different things, Plautz said. You need to be as specific as possible We didnt get everything we wanted when we outsourced to India, but we share some of the blame because we didnt articulate well enough what we wanted.