Outsourcing, Outsourced

Today’s New York Times, in “Indian Outsourcing Comes Full Circle,” reports that major Indian outsourcing companies such as WiPro are increasingly farming work out to staff hired in other developing countries.

We had commented on this trend earlier, observing that cost pressures in India (new MBAs earn more than their US peers) plus the advantage of being in the same time zone as the client were leading outsourcing companies to locate operation in low labor cost countries outside India.

While the article does a competent job of reporting, it fails to comment on two ironies. First is that US companies have completely and uncharacteristically ceded a major multinational industry to an emerging nation. Second is that one of the places where the Indian outsourcers are finding cheap labor is US “states which are less developed.”

So we have the prospect of US companies paying a middleman’s markup to hire domestic workers. How smart is that?

From the New York Times:

Thousands of Indians report to Infosys Technologies’ campus here to learn the finer points of programming. Lately, though, packs of foreigners have been roaming the manicured lawns, too.

Many of them are recent American college graduates, and some have even turned down job offers from coveted employers like Google. Instead, they accepted a novel assignment from Infosys, the Indian technology giant: fly here for six months of training, then return home to work in the company’s American back offices.

India is outsourcing outsourcing….rising wages and a stronger currency here, demands for workers who speak languages other than English, and competition from countries looking to emulate India’s success as a back office — including China, Morocco and Mexico — are challenging that model.

Many executives here acknowledge that outsourcing, having rained most heavily on India, will increasingly sprinkle tasks around the globe…

To fight on the shifting terrain, and to beat back emerging rivals, Indian companies are hiring workers and opening offices in developing countries themselves, before their clients do.

In May, Tata Consultancy Service, Infosys’s Indian rival, announced a new back office in Guadalajara, Mexico; Tata already has 5,000 workers in Brazil, Chile and Uruguay. Cognizant Technology Solutions, with most of its operations in India, has now opened back offices in Phoenix and Shanghai.

Wipro, another Indian technology services company, has outsourcing offices in Canada, China, Portugal, Romania and Saudi Arabia, among other locations.

And last month, Wipro said it was opening a software development center in Atlanta that would hire 500 programmers in three years.

In a poetic reflection of outsourcing’s new face, Wipro’s chairman, Azim Premji, told Wall Street analysts this year that he was considering hubs in Idaho and Virginia, in addition to Georgia, to take advantage of American “states which are less developed.” (India’s per capita income is less than $1,000 a year.)

For its part, Infosys is building a whole archipelago of back offices — in Mexico, the Czech Republic, Thailand and China, as well as low-cost regions of the United States.

The company seeks to become a global matchmaker for outsourcing: any time a company wants work done somewhere else, even just down the street, Infosys wants to get the call….

Most of Infosys’s 75,000 employees are Indians, in India. They account for most of the company’s $3.1 billion in sales in the year that ended March 31, from work for clients like Bank of America and Goldman Sachs.

“India continues to be the No. 1 location for outsourcing,” S. Gopalakrishnan, the company’s chief executive, said in a telephone interview.

And yet the company opened a Philippines office in August and, a month earlier, bought back offices in Thailand and Poland from Royal Philips Electronics, the Dutch company. In each outsourcing hub, local employees work with little help from Indian managers.

Infosys says its outsourcing experience in India has taught it to carve up a project, apportion each slice to suitable workers, double-check quality and then export a final, reassembled product to clients. The company argues it can clone its Indian back offices in other nations and groom Chinese, Mexican or Czech employees to be more productive than local outsourcing companies could make them.

“We have pioneered this movement of work,” Mr. Gopalakrishnan said. “These new countries don’t have experience and maturity in doing that, and that’s what we’re taking to these countries.”

Some analysts compare the strategy to Japanese penetration of auto manufacturing in the United States in the 1970s. Just as the Japanese learned to make cars in America without Japanese workers, Indian vendors are learning to outsource without Indians, said Dennis McGuire, chairman of TPI, a Texas-based outsourcing consultancy….

In one project, an American bank wanted a computer system to handle a loan program for Hispanic customers. The system had to work in Spanish. It also had to take into account variables particular to Hispanic clients: many, for instance, remit money to families abroad, which can affect their bank balances. The bank thought a Mexican team would have the right language skills and grasp of cultural nuances.

But instead of going to a Mexican vendor, or to an American vendor with Mexican operations, the bank retained three dozen engineers at Infosys, which had recently opened shop in Monterrey, Mexico.

Such is the new outsourcing: A company in the United States pays an Indian vendor 7,000 miles away to supply it with Mexican engineers working 150 miles south of the United States border.

In Europe, too, companies now hire Infosys to manage back offices in their own backyards. When an American manufacturer, for instance, needed a system to handle bills from multiple vendors supplying its factories in different European countries, it turned to the Indian company. The manufacturer’s different locations scan the invoices and send them to an office of Infosys, where each bill is passed to the right language team. The teams verify the orders and send the payment to the suppliers while logged in to the client’s computer system.

More than a dozen languages are spoken at the Infosys office, which is in Brno, Czech Republic.

The American program here in Mysore is meant to keep open that pipeline of diversity.

Most trainees here have no software knowledge. By teaching novices, Infosys saves money and hopes to attract workers who will turn down better-known companies for the chance to learn a new skill.

“It’s the equivalent of a bachelor’s in computer science in six months,” said Melissa Adams, a 22-year-old trainee. Ms. Adams graduated last spring from the University of Washington with a business degree, and rejected Google for Infosys.

And yet, even as outsourcing takes on new directions, old perceptions linger.

For instance, when Jeff Rand, a 23-year-old American trainee, told his grandmother he was moving to India to work as a software engineer for six months, “she said, ‘Maybe I’ll get to talk to you when I have a problem with my credit card.’ ”

Said Mr. Rand with a rueful chuckle, “It took me about two or three weeks to explain to my grandma that I was not going to be working in a call center.”

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  1. Anonymous

    Maybe one day the big brains in the US will figure out their chase for the cheaper dollar was tilting at windmills.


  2. Anonymous


    “First is that US companies have completely and uncharacteristically ceded a major multinational industry to an emerging nation. ” —

    The above is not completely true. Accenture, an American company is doing quite well in tapping the talent in developing countries, and in teh case of India, is able to compete effectively with Infosys, TCS..etc. IBM is another company which comes to mind.

    And — “So we have the prospect of US companies paying a middleman’s markup to hire domestic workers. How smart is that?” —-
    The banking industry is notorious for hiring huge number of contractors (paying middle men who are both American and Indian). The mangers seem to prefer the disposable nature of contractors when the IT Dept. has a good budget.


  3. Yves Smith


    The term outsourcing covers a multitude of sins, and has expanded considerably from its original model which was exemplified by EDS in its heyday, namely, of buying “big iron” data centers from major corporations, along with their employees, and operating them on their behalf.

    As for your comments on Accenture and IBM, are you certain you are not including their computer consulting business in with your definition of outsourcing? I consider those to be separate activities, and the companies do as well.

    My brother worked for EDS for 20 years, and spent a couple of years at Accenture in its outsourcing area before moving to HP. He found outsourcing at Accenture to be a small, underresourced business not well understood or appreciated by management. And in a way, with good reason. The mainstream consulting projects produce high current income. The outsourcing projects (nearly all of which had a hardware component) were lower margin annuities. Partnerships tend to have trouble handling that sort of business. The partner who sold the deal wants front end credit, since he may not be there for the term of the deal, and high bonuses makes their less attractive economics look even worse.

    Both Accenture and EDS are having trouble in their corner of the outsourcing market against IBM and HP which bundle equipment sales into their offerings and can take a lower blended margin.

    Again, it’s only one source, but my brother and his colleagues seem always to be competing with HP and IBM. I never hear of Infosys or WiPro, which to me says that the US firms aren’t going after their markets.

    As for IT employees, I know of the practice only with investment banks who do indeed use a lot of consultants. And the middlemen do not play the same role as outsourcers. They are “agencies” and act as headhunters. They screen candidates, pass along resumes, and take a percentage. Unlike outsourcers, they do not negotiate project scope, price the project, or, most important, play any role in providing the service.

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