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`Offshoring' jobs doesn't always pay
By Justin Pope
The Associated Press
February 1, 2004
BOSTON -- Like many Americans, Michael Prince worries about the
economic impact of "offshoring," the trend of sending
information-technology jobs to countries such as India and the
But politics isn't why Prince isn't exporting info-tech work at his
own company. The IT chief at retail chain Burlington Coat Factory
simply isn't convinced it's good business.
"I'm always under pressure to squeeze out savings," said Prince, who
supervises a staff of about 180 that keeps the Burlington, N.J.,
company and its 300-plus stores humming. "But you can work cheap, or
you can work smart."
The migration of tech jobs to countries that offer skilled workers and
cheap wages is not just a fad. Forrester Research predicts at least
3.3 million white-collar jobs and $136 billion in wages will leave the
United States by 2015.
For businesses, the appeal is undeniable. Thanks to the Internet, jobs
like software development and systems maintenance can be handled in
countries where workers are well-trained and speak English, but
command about one-sixth the wages of an American worker.
But as the offshoring wave breaks around them, some executives like
Prince are holding firm, insisting it isn't the panacea.
"It's absolutely cheaper," said Jim Burdiss, the chief information
officer at Smurfit-Stone Container Corp., a Chicago-based manufacturer
of paper packaging products that has eschewed sending tech work
offshore. "But you have to look at the risk associated with it, both
geopolitical as well as the morale factor with your employees."
Experts say plenty of companies are handling offshoring well and
reaping genuine rewards.
But many of the well-doers are big, IT-heavy companies like General
Electric and Citigroup. They have been at it for years and have taken
things slowly. They also have huge economies of scale, whereas Burdiss
said the math simply didn't add up for his smaller company.
There is some evidence of a slowdown in outsourcing, the more general
trend of which tech offshoring is a subset.
A survey by TPI Inc., an outsourcing adviser, found that the biggest
outsourcing contracts ($200 million and up) were flat in 2003 at $55.7
billion, while the number of smaller contracts fell.
Peter Allen, a TPI managing director, said that when clients ask for
advice on outsourcing, 30 percent of the time he advises against it.
Many companies already have had a bad experience.
In a survey conducted by DiamondCluster, a Chicago consulting firm, 78
percent reported having prematurely ended at least one outsourcing
contract. Because it's a hot political topic, those failures tend to
attract attention when they involve offshoring; investment bank Lehman
Brothers and Dell Computer Corp. have been in headlines after moving
call-center work back to the United States.
"It's amazing under economic pressures how many folks will jump and
look for the silver bullet, and later it doesn't turn out to be what
they thought it was going to be," said Chris Disher, a vice president
at Booz Allen Hamilton, a management consulting firm.
In some industries, like accounting and drug development, worries
about how U.S. regulators will respond have slowed offshoring, said
Christopher Koch, executive editor of CIO magazine, a publication for
corporate information officers. Similarly, defense contractors face
rules limiting involvement by foreign nationals in some projects.
But the more common problems relate to communications -- and not just
trouble understanding accents. Experts say companies often fail to
anticipate how much money and energy they'll spend dealing with
"Companies look at offshore and see the salary difference and say,
'Wow, the salary difference is 90 percent,' " said Atul Vashistha,
chief executive of outsourcing advisory firm neoIT. "What they really
forget is that there's other investments that they have to make --
investments in training, in cultural understanding on both sides."
With those costs, many analysts put the real savings at 20 percent to
Most importantly, however, experts say many companies fail to
anticipate the way offshoring will affect their own companies. Too
sudden a shift can do more harm than good.
"You get renegade business units that decide the outsourced services
don't meet their needs," TPI's Allen said. "They end up creating
shadow organizations and you have redundancies."
Prince, the Burlington Coat Factory executive, said he wants his
info-tech staff to know his entire business, and the only way to learn
it is to be fully involved in all facets.
Prince isn't persuaded that kind of rapport is possible with an
outside vendor -- especially one half a world away. And the last thing
he wants is to farm out the work and then have to do it anyway.