Flak over offshore outsourcing swells

Cost savings make offshore look good

The financial rewards from offshore outsourcing sometimes outweigh the political risks.

Two years ago, Tata Consultancy Services America started work on a new Web-based unemployment insurance claims system for the New Mexico Labor Department. The system would include an intranet site and an interactive voice-response call center offering service 24 hours a day, seven days a week.

All aspects of the project initially were done onsite, but when department officials realized they could save as much as $1 million over the life of the roughly $7 million contract, they agreed to let New York-based TCS do some work offshore, said Jim Thomas, TCS' vice president of marketing.

The requirements and system analysis for the project were done onsite, and system development and testing were done in Chennai, India, he said.

To ensure the work met the necessary standards, department officials traveled to India to inspect the site where the work would be performed, he said.

TCS, the North American-subsidiary of Tata Ltd., has outsourcing contracts in four states and Charleston, S.C., Thomas said. He identified two of the four states as New Mexico and Pennsylvania, but declined to name the other two at the request of the customers. The company provides data center support to Charleston. Only the New Mexico contract involved offshore outsourcing, he said.

TCS provides commercial and government customers a variety of onshore and offshore information technology services, including systems integration, application development, consulting, infrastructure management and engineering services.

For the Pennsylvania Department of Environmental Protection, the company built and deployed an e-mapping application that combines geographic and environmental information with overlapping layers of topographical maps, available to both public and private users.

The effort by some states to ban offshore outsourcing has not hurt the company's business, which remains predominantly onsite, Thomas said.

"We have in our bag of tricks the offshore model, but if they are prohibiting us from using it, that's fine with us," he said.

George Newstrom, Virginia's secretary of technology and chairman of the World Information Technology and Services Alliance

More states eye bills to keep government tech jobs at home

State and local governments will continue their full-scale retreat from offshore outsourcing this year to avoid the political backlash that often accompanies the loss of government jobs to overseas sites, industry and government officials said.

A push by legislators to ban or restrict offshore outsourcing on government contracts has begun in 11 states, and groups tracking the legislation expect more states to follow.

"Once the [legislative] sessions start rolling, you may see more," said Justin Marks, a research analyst with the legislative information services program at the Denver-based National Conference of State Legislators. "This is just the beginning of the discussion on the issue."

Several bills under consideration do not call for an outright ban but require that, if a citizen asks, a call center location must be disclosed and that call rerouted to a U.S. operator upon request, said Michael Kerr, director of the Enterprise Solutions Division with the Arlington, Va.-based Information Technology Association of America.

Indiana canceled a $15.2 million contract in November with New York-based Tata Consultancy Services America, a subsidiary of Tata Ltd., for upgrades to computers processing unemployment claims when Gov. Joseph Kernan learned that no Indiana companies had competed for the contract awarded under the previous governor, said Jeff Harris a spokesman for the Indiana Department of Workforce Development.

Some integrators, including Affiliated Computer Services Inc., Dallas; Electronic Data Corp., Plano, Texas; and IBM Corp., Armonk, N.Y., have extensive offshore capabilities to support their commercial sector businesses. Datamatics Ltd., Tata and Satyam Computer Services Ltd., all based in India, are among those that have substantial offshore capabilities. But officials with these companies said they expect to rely on little, if any, offshore services on their state government contracts.

Offshore outsourcing includes everything from computer programming and software development to transaction processing and call center support. It has attracted the interest of government and industry alike because of the cost savings derived from lower labor costs overseas.

State and local governments spend about 25 percent of their $40 billion annual information technology spending on outsourcing, according to Reston, Va.-based market research firm Input Inc.

Determining how government work goes offshore is problematic, because it is buried in the pricing structure of the contracts, said Jim Krouse, Input's manager of state and local market analysis.

"It's nearly impossible to figure out, because we aren't privy to the contract structures," he said.

Lawmakers in Connecticut, Florida, Indiana, Maryland, Michigan, Missouri, New Jersey, New York, North Carolina, Wisconsin and Washington have introduced or plan to introduce legislation banning or restricting offshore outsourcing. Although none of the bills have passed, they appear to have strong support in those state capitals, Marks said. For example, the bills introduced in New Jersey and New York passed their respective senates unopposed and are being debated on the house sides.

The resistance to offshore outsourcing is strong, not only in states that have lost technology jobs overseas, but also in Rust Belt states such as Indiana and Michigan, which have lost manufacturing jobs to overseas venues, Marks said.

The support for offshore outsourcing in state and local government is "extraordinarily tenuous," said George Newstrom, Virginia's secretary of technology and chairman of the World Information Technology and Services Alliance, a consortium of industry IT associations from around the globe.

"If you're sitting in a political office, you have a hard time telling your constituents you want to send state jobs offshore. ... It doesn't play well at home," Newstrom said.

Even Virginia Gov. Mark Warner, who enjoyed a successful technology career before he was elected to the state's top office, is reluctant to have any state technology services done offshore, Newstrom said.

"Our tax base has eroded because [high-tech] jobs in Northern Virginia have been impacted," Newstrom said. "There's not a lot of interest right now in sending more jobs offshore."

For these reasons, technology companies with substantial offshore resources said they are content to wait until states have weighed the pros and cons of offshore outsourcing and are more comfortable with it.

Brian Whitfield, vice president of state and local government Americas with IBM, said Big Blue's customers vary widely in their opinions about offshore outsourcing.

"There are several [customers] that want to learn how it works, what it means and what the benefits are," he said. "Others are very succinct they want the work done only in the United States."

State lawmakers are caught in "a classic policy dilemma" over offshore outsourcing, Marks said. On one side, they are aware they can save money by tapping offshore support. On the other side, they fear any further loss of jobs in their states when the unemployment rate remains high.

In response to worries about government contracts moving offshore, most overseas companies will do the work onsite in the state alongside government employees, said Rishi Sood, principal analyst with the Stamford, Conn.-based market research firm Gartner Inc.

"State and local governments that have used offshore companies have been impressed by the quality of work delivered and the cost to perform the task," Sood said.

The large number of jobs associated with federal and state government work in particular make offshore outsourcing especially controversial, more so than at the municipal level, said Mark King, ACS' chief operating officer.

"The federal government is least likely to do it because of union issues, and that's where there is the most heat for a politician," King said. "The least heat is at the very lowest levels of city and county government."

John Kost, Gartner's managing vice president for global public-sector services, is skeptical about the private sector's claim that there is little or no offshore work is being done for state and local government.

"There's already a lot of it going on, but it's being kept under the radar screen in most states and localities," he said.

Kost said governments are going to be hard pressed to write bid evaluations that discriminate against offshore work without running the risk of explicitly discriminating against companies in other states or nations.

For their part, the integrators are optimistic that over the next decade, offshore outsourcing gradually will become part of the fabric of state and local government.

A decade ago, about 10 percent to 20 percent of commercial customers were willing to consider offshore outsourcing, King said. But now 75 percent of commercial customers are requesting, and even demanding, that contractors move work offshore so they can get a lower price.

In three to five years, it is possible that government might be where the commercial sector was a decade ago, King said. The most likely state and local customers to move work offshore will be those that face the most challenging budget problems, he said.

"There will be some mavericks. But you aren't going to see an avalanche of jobs moving offshore, only a trickle," King said.

Staff Writer William Welsh can be reached at wwelsh@postnewsweektech.com.

About the Author

William Welsh is a freelance writer covering IT and defense technology.

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