December 11, 2002 4:00 AM PST

U.S. firms move IT overseas

Under pressure from overseas rivals, U.S. companies selling information technology services have a new mantra: If you can't beat them, join them.
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IT services companies are jostling to promise customers cheaper, flexible services using technology professionals in low-wage countries such as India, China and Mexico. Hewlett-Packard is the latest U.S.-based company to announce its overseas intentions. At a meeting with financial analysts last week, Ann Livermore, HP's services chief, said the company plans to relocate a major portion of its IT services work to India.

"We think customers are going to put a lot of pricing pressure on the consulting and integration market," Livermore said. "We are going to aggressively move everything we can offshore."

HP already has several thousand services employees in India. The company said it will give a more detailed version of its offshore consulting plan in January.

Last month, computer services giant Electronic Data Systems announced its "Best Shore" program, promising a 40 percent increase in personnel and resources devoted to low-cost applications services centers around the world. EDS currently has 4,500 employees working out of 13 Best Shore facilities, which are located in cities such as Chennai, India; Sao Paulo, Brazil; and Wellington, New Zealand.

In addition, IBM's services wing says that for more than a year it's had what it too calls a "Best Shore" strategy. Big Blue has services centers in the low-cost countries of India, Mexico, Argentina, Brazil, Venezuela, Canada and China.

Frances Karamouzis, an analyst with market research firm Gartner, said U.S.-based IT service providers are going abroad as a response to competition from Indian technology services companies such as Infosys and Wipro. "These are ways to position their competitive offering to the Indian firms," Karamouzis said.

Those Indian businesses are faring much better than their U.S. counterparts amid the tech downturn. In the most recent two quarters, Infosys saw sales rise 26 percent, and Wipro's revenue jumped 26 percent. In contrast, EDS's revenue for the past three quarters edged up only 4 percent, and IT services provider Computer Science's sales for the past two quarters increased less than 1 percent.

Even so, Indian-based companies are siphoning off just a few drops from the U.S. IT bucket. Karamouzis estimates they take in about $6 billion per year, or less than 5 percent of U.S. IT spending. But the offshore model has gained a foothold and will grow, she predicted.

Indian companies began to take on low-profile tasks like legacy software maintenance in the early 1990s, Karamouzis said. By focusing on quality, they gained the confidence of U.S. corporations, and now they are working on more important applications, she said.

IT's passage to India
Already, more than 300 of the Fortune 500 firms do business with Indian IT services companies, according to Gartner. The research firm predicts that by 2004, more than 80 percent of U.S companies will have considered using offshore IT services. In addition, more than 40 percent of U.S. corporations will have completed some type of offshore IT pilot program or will be using IT services with an overseas component by that time.

That IT work is headed offshore is confirmed by a November report from Forrester Research, which estimated that the number of computer jobs moving overseas will grow from 27,171 in 2000 to a cumulative total of 472,632 by 2015. Forrester researchers predict that other services--including call center services and back-office accounting--will follow IT operations in moving abroad.

By 2015, a total of 3.3 million U.S. jobs and $136 billion in wages will transfer offshore to countries such as India, Russia, China and the Philippines, according to Forrester.

Reasons for the shift start with lower wages. HP pegs the cost of a talented programmer in India at about $20,000 a year, a fraction of the cost of a top U.S. tech worker.

Other factors fueling the shift offshore, according to Forrester, include the emergence of low-cost high-bandwidth telecommunications links, standardized business applications and Internet-based collaborative tools.

Greater flexibility also may entice customers to prefer an offshore model or a combination of offshore and onshore services. With operations in both the United States and Asia, an IT services company can offer clients around-the-clock support--or what EDS calls a "follow the sun" capability.

Not everyone believes the U.S. IT industry is on the verge of withering away. Norm Matloff, a computer science professor at the University of California at Davis, argues that the need for face-to-face interaction remains vital for programming projects. "Most U.S. firms will find that it is just not worth it to outsource software development overseas on a large scale," he said.

Gartner's Karamouzis agreed Matloff has a point, especially when it comes to software companies' core products and to applications that require a great deal of expertise in a particular industry, such as banking.

However, Indian firms typically can accomplish IT projects for U.S. clients with 90 percent to 95 percent of the work done in India, she said. She estimated that as much as 40 percent to 50 percent of U.S. IT services work could be done overseas in the next five to 10 years--raising serious concerns about the prospects for U.S. IT workers.

 

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