Out sourcing.

Once confined to technology applications and development, offshore outsourcing is growing quickly into knowledge and service areas. Its principal driver: cost savings.

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In the ever-evolving lexicon of business, "multitasking" became popular in the 1990s with the growing sophistication of computers. Expect to hear a lot more about "multishoring" in the years to come.

Multishoring essentially means outsourcing work to more than one offshore location, and it is accelerating at the largest multinationals. It technology functions like that are being sent overseas, moreover, but a whole raft of business, processes like customer service and financial analysis--hence the rise of "business process outsourcing," or BPO.

While top U.S. companies like General Electric Co. and Hewlett-Packard Co. are often cited as bell-wethers, European companies like BP plc and British Airways have also instituted huge programs, and mid-sized companies are clambering on the bandwagon, too. Be it India, the Philippines, Hungary, Guatemala or China, developing countries are eagerly putting out the welcome mat for foreign companies.

The siren song of offshore outsourcing is mostly about money--saving through labor cost arbitrage, by replacing a high-paid job in a developed country with a position for far less in what is usually a developing nation. Gunn Partners, a noted outsourcing consultant, says that companies can frequently save as much as 70 percent on pure labor expenses--though higher telecom, travel and administrative costs may cut those savings in half--and recover their costs within a year. Many foreign-based vendors claim to provide better service levels, as well.

Research seems to support some of those claims. A Forrester Research study earlier this year of 145 U.S. companies found that 88 percent claimed to get better value for their money overseas, and 71 percent said overseas workers did better work.

The cost figures practically leap off the page. Gunn cites one situation in India where the unit manager was making $5,000 a year and the staff just $2,500 each. In another case, a position cost $15,000 in India and $85,000 in the U.S. At a time when companies find they have little pricing power or revenue growth, while health care costs are skyrocketing, such prospective savings gleam like a beacon in a dark night.

A.T. Kearney, a management subsidiary of EDS Corp., has concluded that back-office processing of information technology and IT-enabled services will continue to be outsourced, but the most significant growth and impact will be in more highly skilled services, including financial analysis, regulatory reporting, accounting and graphic design.

Consultants dismiss the idea that large-scale outsourcing is a fad that will disappear if economic growth ever comes steaming back after years in the doldrums. "This trend is not simply a reaction to the slow economy," says Bob Cecil, an executive director with Gunn. "It's accelerating, and will continue to grow as corporations realize that offshoring and multishoring are among the few remaining options for sharply reducing costs and improving competitive advantage."

"The whole concept of offshoring is here to stay," says Mark Teen, president of EquaTerra, an outsourcing advisory firm in Houston, with a major reason being "the access to a labor pool that is going to be more competitive [on costs]. The big focus areas we see are finance and accounting, HR and procurement. Outsourcing firms are offering technology solutions, and are handling anything from 20 percent of processes to 100 percent."

The potential dimensions of offshore outsourcing are startling:

* McKinsey & Co. estimates the market at $12 billion and says it is growing at an almost unbelievable 65 percent a year, destined to reach $142 billion by 2008.

* A.T. Kearney predicts that by 2008, financial services companies will have outsourced 500,000 jobs, saving them a collective $30 billion.

* By 2015, 3.3 million U.S. jobs will have moved offshore, according to Forrester Research, with more than two-thirds of those (70 percent) going to India. The rest will go to the Philippines (20 percent) and China (10 percent).

While the GEs of the world have created their own programs, most companies are going offshore with help. Anymore, that can come from huge consulting organizations like Accenture, EDS Corp. and Affiliated Computer Services (ACS), or a host of smaller, often country-specific firms that contract directly with Western companies, hire the local labor force and manage the operation from the overseas venue. (Writer Gregory Millman details the efforts undertaken by giant outsourcing consultants and their approach to the market; see the article on page 55).

"A lot of clients moved from a captive approach to outsourcing with others," says John Halvey, a partner at the law firm Milbank, Tweed, Hadley & McCloy in New York. "They recognize that the savings are likely going to outweigh the geopolitical risk."

The migration overseas has accelerated, experts say, as the returns from domestic shared-service support centers has waned. As offshore outsourcing matures, it has spawned new terms like "nearshoring" and "twoshoring," as well as "multishoring" (see glossary). Then there are "multiclient service locations" (MSLs), in which outsourcing is handled through one geographic location for multiple clients. The advantages: a full infrastructure, scale and pool of expertise to provide services at lower costs, yet the ability to address the complexity of managing different fiscal, legal, economic and human resource issues on a country-by-country basis.

Daniel Lipson, an associate partner with Accenture's Finance and Performance Management Service Line, argues that companies using MSLs see an improvement over internal shared services centers that may lack customer focus, buy-in from the rest of the business and an appropriate governance structure.

Some outsourcing companies have established several centers to handle different disciplines. I-Flex, which calls itself India's largest product software company, has established "centers of excellence" to handle implementation, support and strategic services to clients in financial services in disciplines such as customer relationship management, business intelligence and payment systems.

Logistical Hurdles

For all the positives and a growing slate of best practices, establishing an offshore outsourcing program isn't a piece of cake. "Although outsourcing has grown to become a widely accepted and strategic business process, organizations are still struggling to perfect the process," says Frank Casale, founder and CEO of The Outsourcing Institute.

One main hurdle: logistics. "Moving your accounts payable operation to Bangalore, India, is not the same as moving it to a shared-services operation in Des Moines," says Scott Furlong, an executive director with Gunn Partners. "Companies can't rush headlong into this. There are all kinds of cultural, political and other concerns. For example, most offshore locations do not have 'safe harbor' status, which raises concerns about having them process sensitive data."

"There is a growing base of experience in India, but you're relying on your ability to manage the vendor and enforce your rights," says attorney Halvey. "That's particularly important on the patent side." Halvey, an expert on offshore outsourcing, says Milbank Tweed was one of the first law firms to get into the area, and has been involved with more than 300 deals since the early 1990s, working chiefly for Global 1000 companies.

"When you're dealing with offshore, there's a different spin--every customer wants to own the intellectual property that is created," he says. "If you do an outsourcing deal in the U.S., you have a sense of what is involved. As you move further offshore, that becomes less clear.

"Regulatory issues are another area where there can be a different flavor," Halvey adds. "If you're a bank or another kind of regulated entity, there may be additional regulatory hurdles [overseas]." Taxes, both current and prospective, also need to be addressed, especially when they may be levied on a multishore versus a unitary approach.

One thing that could eventually slow the offshore movement is domestic worker unrest. Gunn Partners' Cecil cautions that high-wage countries like the U.S. and the United Kingdom should be developing job replacement strategies to deal with the jobs lost to offshoring. "When New England lost its cotton mills, there was a great public outcry, but now New England has moved beyond those jobs to much more high-tech areas, and to buy low-cost in Thailand and China," said Cecil. "Similarly, countries threatened by job migration need to upgrade into higher-value areas."

"There have got to be some arguments related to [the loss of knowledge jobs], but the costs to provide those services [in developed countries] are just not competitive with the supply and demand," says EquaTerra's Toon.

Labor unions have already seized on company plans to move jobs offshore as a potential bargaining chip. In late July, a union leaked to The New York Times the contents of a conference call ill which two senior executives at IBM Corp. reportedly said the company needed to accelerate its efforts to move white-collar jobs overseas.

Yet, not all of the movement is away from high-cost venues. Some observers see inklings of a "reverse offshoring" taking place, with foreign countries moving work to the U.S.--think of the Japanese and German automakers' plants in the South--and some jobs moved elsewhere coming back. More than that, workflows are becoming ever more dispersed.

"As products are designed in one or more countries, manufactured in other countries, assembled in others, and sold throughout the world, job migration will become even more global," write Roger Herman and Joyce Gioia in the Herman Trend Alert. "Companies will employ multi-lingual managers who will coordinate activities in several countries simultaneously, managing an international work flow.

"As part of this trend, manufacturing jobs eventually will return to the United States," they add. "Employers in America and other countries are recognizing the higher cost-benefit of utilizing workers who have training, experience and the desired work ethic. Even though they're more expensive, they're also more productive. Some jobs that went to Mexico have returned."

But in the near term, expect a lot more offshoring. "As long as a service can be provided in the right quality and in a timely way, does a Fortune 50 company care whether an HR call center is in London or Dubai, or Mumbai or Hong Kong?" asks EquaTerra's Toon in something of a rhetorical question. It's clear that the cravings for savings will be driving offshore outsourcing for years to come.

The Philippines Comes On Strong

India may be the clear leader among Asian outsourcing providers, but the Philippines wants to make it a horse race.

The government there has been actively promoting its labor force which it claims is ranked first worldwide for knowledge workers--and cites a META Group ranking that puts its telecommunications capabilities on par with India's. Safeway Co., the supermarket giant, has recently announced plans to open a support and development center there under-a new subsidiary that will focus on software development, maintenance and support, and will employ more than 200 IT professionals.

RCG Information Technology, based in Edison, N.J., has been in the Philippines since 1997 and has a "delivery center" in Manila with capacity for about 180 seats working in three shifts, according to Rachelle McLure, RCG's national director for Offshore Delivery Services. RCG has focused on IT rather than BPO specifically, Web technologies, software testing, object-oriented (OO) tools and middleware for mid-range and Intel server platforms programming, as welt as legacy systems maintenance and conversions.

McLure says RCG recognizes the depth of service in India but chose the Philippines for the top talent, "world class English proficiency" and high affinity for American business culture it found there. She adds that in the wake of the Asian financial crisis of the late 1990s, the Philippines has loads of first-class office facilities that have never been occupied

Since its arrival, RCG has been working with some 50 clients, many of them U.S. based multinationals, but some European firms as well. Included have been large oil and gas companies, chemical manufacturers and retailers, McLure says. The firm has an ambitious goal: to double its volume in the Philippines center every year.

How United Technologies Went Offshore By Peter S. Cohan

United Technologies has saved $50 million by outsourcing to India. Its chief information officer, John Doucette, initially estimated that he could cut $28 million from UTC's $125 million yearly outsourcing budget by going to India. To get there, he took the following steps, which anyone else might want to emulate:

1. Decide where to outsource. Doucette chose India over Russia and China due to Indian software companies' 10 years of outsourcing experience. He particularly liked its certification at the highest level of Carnegie-Mellon University's Capability Maturity Model (CMM) development methodology.

2. Compare vendors. Doucette sent out requests for proposal (RFPs) to mainframe, ecommerce and ERP programming vendors. Using its FreeMarkets online marketplace, UTC got bids from 43 vendors. Doucette ranked the vendors using a 500-criteria spreadsheet covering service offerings and capabilities, price, management practices and procedures, customer base and business profile and strategy.

3. Contract with the top five. Doucette signed fixed-price development and maintenance contracts with the top five companies identified in the ranking. The entire process took three months.

Doucette started with a sourcing plan stating which activities would be moved offshore, which went to U.S. outsourcers and which stayed at United Technologies. He first asked whether the work was strategic; if it was, it remained within UTC. If not, he put the work in the lowest-cost country.

As a result, Doucette sent help desk, network, desktop, midrange, mainframe and Web-hosting work to Computer Sciences Corp. and plans to do 80 percent of UTC's application development and support in India. UTC kept in-house its IT leadership, project management, business analysis and 20 percent of application development and support--helping it maintain competitive outsourcing costs. UTC also managed its outsourciog risks by:

* Asking its outsourcing vendor to dedicate personnel to the UTC account. UTC educated them about its systems and applications.

* Creating a detailed transition plan and assigning an onsite project leader from UTC to coordinate with the vendor's project leader.

* Building a significant in-house quality assurance department.

* Conducting monthly and quarterly performance reviews through its vendor's account manager and its internal project managers

Peter S. Cohan is president of his own management consulting and venture capital firm (www.petercohan.com) and author of the forthcoming Value Leadership (Jossey-Bass, 2003).

AN OUTSOURCING GLOSSARY

Offshoring--Sending work to an overseas location.

Multishoring--Sending outsourced work to several overseas locations. choosing between them based on the job to be done and the relevant skills available.

Twoshoring--Using an offshore location and a domestic one.

Nearshoring--Sending outsourced work to a nearby locale--Mexico or Canada (for the U.S.), or Eastern Europe for a Western European country.

Multiclient service locations (MSLs)--Offering business processing services through one geographic location to multiple clients.