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Let's all move to India (China, Vietnam, Eastern Europe etc.)

Offshore IT services

In a teleconference held June 5, 2003, IDC analysts said they expect global outsourcing in the IT industry to increase, which will put smiles on the faces of workers in China, The Philippines, India, Vietnam, and Eastern Europe, but will continue to depress U.S. and Western European IT workers. Except the French.

The presentation pointed out that the trend of moving as much work as possible to countries with the lowest wages is not new. In the case of the U.S., it started with apparel and electronics manufacturing in the 1960s, and the offshore trend in those industries has been so complete, said one IDC person, that today "there is not one TV manufactured in the U.S."

Now IT hardware development and manufacturing, software development, business process functions (like HR and customer service), and IT services, including infrastructure monitoring and management, are leaving high-wage countries.

IDC sees some political backlash in developed countries to the idea of "exporting jobs," and expects legislation to be introduced in many jurisdictions that will try to halt this movement. But IDC also believes global companies will find ways around these restrictions.

According to a study IDC did in January 2003, fewer than 15% of U.S. IT firms are opposed to using offshore workers, 20% prefer to use U.S. resources, and about 65% are "open to using resources outside U.S."

IDC warns that Bangalore, India's primary IT hub, may no longer offer the world's best IT outsourcing value; that the infrastructure there is saturated; and wages for skilled workers are being bid up, with many new grads demanding annual salaries of $4,000 (USD) or more -- not only in Bangalore but all over India.

China is cheaper than India, but IDC people say it's not as easy to open up a shop there as it is in India; that significant time must be put into developing what they politely call "political relationships."

In Europe it looks like India, China, and other Far East nations are not getting as much outsourcing attention as they are getting in the U.S.

The European outsourcing pattern looks like a wave moving eastward, with most of the activity in the Czech Republic,Russia, Romania, and the Baltic States (e.g. Latvia and Estonia).

Two European countries break this pattern: The U.K. has strong historical ties to India, so India is an obvious outsourcing location for U.K. firms. And, says IDC, "France's pride in local software/services houses" leads most French firms to avoid sending work out of the country even if it can save them money.

A strong discussion point was whether it is better for a company to open a branch and hire directly in the low-wage country or to work second-hand through local contractors. There was no clear consensus on this; ownership and control have advantages, but working with a local company reduces liability and may eliminate some political problems at both ends of the outsourcing chain.

One notable trend, everywhere, is that small software and IT shops are being snapped up by larger ones.

Another trend IDC notes is that the worldwide IT consulting industry is under -- as they put it -- "severe downward pricing pressure." In other words, everyone is trying to undercut the next one, not just in any one country but everywhere in the world.

Yet another trend is that nearly every country with lower wages and lower cost of living than the U.S., Canada, and Western Europe is trying to get into the outsourcing business in one way or another, whether in high-wage IT areas or by running lower-wage call centers, payroll processing facilities, and doing other low-skill but necessary clerical work.

One factor that may reverse some of the process of everything moving offshore, at least in IT, is advances in "utility model" on-demand computing, which kills some of the advantages of having utility-style computer centers in one country instead of another. However, not all of IDC's people agree that this will make much difference, so the company has no real "official" position here.

But IDC's people do seem to agree that on-demand computing is a coming thing, and that it is an area that will be dominated by huge companies like IBM, EDS, and others capable of operating data centers all over the world and shifting resources to wherever they are most needed. And as this business change takes place, IDC was saying, all local and regional players -- whether in the U.S., Germany, China or India -- will have trouble competing.

The upshot

Like it or not, work that takes no particular cultural tie -- what we might call "generic telework" -- is going to move to the cheapest possible place, and large companies with presences in many countries are going to have a growing advantage over local and regional firms.

Another factor brought up is that cities whose populations speak a wide range of languages and come from a large number of cultures will have an advantage in some business areas. Vancouver, Toronto, Sydney, and Melbourne were specifically mentioned.

Linux and Open Source were mentioned as a factor in making global outsourcing easier, not necessarily in and of themselves, but because they lower the entry cost barrier to the IT services business no matter where you are.

And in a larger sense, as one IDC analyst put it, "Linux represents the growing commoditization of IT in general."

This commoditization trend, IDC is convinced, will continue to be the biggest factor in IT industry directions in the near future, with or without global outsourcing. We are not going to see a return to the "glory years" of 1998 - 2000 no matter what.


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