BPO Backlash

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From Red Herring (subcription site)
<b>Top 10 trends: Outsourcing backlash</b>

<!--QuoteBegin-->QUOTE<!--QuoteEBegin--><i>Once popular with cost-conscious IT execs, outsourcing has been shown to be full of security holes.

December 19, 2003
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In October, global outsourcing nearly flat-lined the hospital at the University of California at San Francisco. To save money, the school had been sending out thousands of patient medical records for transcription. Halfway across the world, a woman in Pakistan had taken on some of the work. Things seemed to be working well for both – and neither knew about the other because of three subcontracts in between. That changed when the woman’s subcontractor in Texas did not pay. The Pakistani worker contacted UCSF and threatened to release the confidential patient information over the Internet if they did not help her collect, according to the San Francisco Chronicle, which broke the story.
<span style='color:red'>(there's always a Paki to screw up isn't it?  <!--emo&:furious--><img src='style_emoticons/<#EMO_DIR#>/furious.gif' border='0' style='vertical-align:middle' alt='furious.gif' /><!--endemo-->  Well, that's why they are called Pakis! )</span>

With that, outsourcing suddenly shifted from an unqualified business no-brainer to a risky financial liability.

IT outsourcing was once essentially limited to software programming and staffing call centers. No longer. Now outsourcing tasks cover everything from storing sensitive financial, tax, and medical records to handling mission-critical database files. With the specter of financial blackmail looming, an outsourcing backlash may emerge in 2004. Security concerns, compounded with the fear of jobs lost to foreigners, as well as the wake-up call that outsourcing does not equal fast and easy cost savings, will lead companies to rethink their practices.

“There are many wrong reasons for outsourcing,” says Lily Mok, a senior consultant at People 3, a New Jersey-based human resources and IT research division of Connecticut-headquartered research firm Gartner. Companies may think they are saving money, she adds, but high costs are involved at the outset, namely related to infrastructure set up.

Offshore IT outsourcing took off during the late 1990s, with Y2K coding. Since 1999, outsourcing has grown an average of 23 percent per year, according to Gartner data. The outsourcing industry now employs 170,000 in India, where it has been the most successful. Revenues there reach more than $2 billion annually, according to market research firm IDC.

But trends can be deceiving. “A reality check is warranted. Offshore outsourcing will not be applicable to all enterprises, all IS roles, or all IS professions,” says Diane Morello, an analyst at Gartner.

Outsourcing’s downside is in the spotlight, especially for firms that failed to thoroughly appraise the costs and risks at the outset. One example of an outsourcing gig gone wrong: Dell’s recent decision to stop sending U.S. technical support calls for two of its corporate computer lines to Bangalore, India. Because the offshore call center workers could not answer customers’ technical questions, Dell faced numerous complaints and had to route calls back to U.S.-based call centers.

In 2004, a presidential election year, the U.S. government could be a key player in curtailing offshore outsourcing. With unemployment and the economy as hot topics, political opposition to issuing H-1B visas, which allow foreigners to enter the U.S. for training, has been mounting. According to an annual report released by the Department of Homeland Security’s Office of Immigration Statistics, the number of H-1Bs issued to workers in the high-tech industry dropped 74.3 percent, from 105,692 in 2001 to 27,199 in 2002.

In defense of struggling U.S. employees, some states have nixed outsourcing government contracts. In one highly publicized move, Indiana governor Joseph Kernan shut down a $15.2 million deal with the Indian company recruited to upgrade the Indiana state computers processing, ironically, unemployment claims. New Jersey has passed a bill to prevent government contracts from being outsourced overseas.

One proposal is the offshore development hybrid model, which enlists trusted U.S. development firms as intermediaries in the offshore development process. “Offshore development is here to stay, but companies are looking for ways to mitigate the risk,” says Robert Northrop, a Design and Development Director with technology consulting firm Tallan. With the hybrid model, the per-hour cost is greater than regular offshore development, but the risk is much lower, because locals with experience in the offshore market are heading up development.

How much does outsourcing really save companies? According to a November 2003 report by People 3, only 21.1 percent of companies surveyed reported a cost savings of greater than 20 percent due to IT outsourcing, while 18.4 percent did not achieve any cost reductions, and 9.2 percent actually had an increase in costs from outsourcing contracts.

“Many companies often neglect to factor in all costs associated with managing outsourcing engagements, which average 4.5 percent of the total contract value and can be as high as 15 percent,” says People 3’s Ms. Mok. The report states that “the word on the street is that companies can save as much as 40 percent by outsourcing some or all of its IT capabilities. The true savings, however, are not always as promising as one would expect.” Because of the high costs and risks associated with offshoring, some companies are opting to nearshore outsourcing, giving work to neighboring countries instead of going overseas.

Though it once glittered as a savior of IT savings, outsourcing certainly isn’t gold.
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