Computer services firms see offshoring as survival tactic

12:43 PM CDT on Saturday, September 11, 2004
By CRAYTON HARRISON / The Dallas Morning News
Third in an occasional series

Summary

Electronic Data Systems Corp. is going to look a lot different next year.

As the Plano-based computer services firm pursues a cost-cutting plan that could cut up to 20,000 jobs, it's more than doubling the size of its offshore workforce to 20,000 by the end of 2005.

The message is clear: EDS and many of its rivals believe their future lies offshore.

The computer services industry is going through a historic transformation reminiscent of the overhauls the textile and automotive industries experienced in the last century. The adjustment has been jarring both for computer services workers and for U.S.-based executives trying to figure out how to compete in an increasingly global economy. The issue of moving jobs overseas even erupted into the political arena this election year.

"We, as a nation, got caught a little bit unawares," said Akiba Stern, a New York-based Shaw Pittman attorney who helps clients negotiate outsourcing deals. "The last two years have just been a flood. Once one service provider goes and gets the cost advantage; everybody else has to follow suit."

What makes the computer services industry adaptable to this new world is the ease with which the product – information – can be sent around the world. The Dallas-born industry began mushrooming as companies started farming out more and more back-office work. And then the offshoring phenomenon took off, carrying jobs along with it. EDS and its rivals are searching for the right strategy to deal with the threat of offshore competitors armed with cheap labor and infrastructure. Many U.S.-based computer services firms have simply built their own operations overseas. Others have spread out the work among various countries to give customers a choice, and still others are deploying and redeploying workers as necessary to stay competitive.

The industry is not simply exchanging U.S. jobs for offshore jobs. The traditional technology outsourcing business no longer holds the promise of sure, quick growth. Instead, the giants of the industry feel forced to provide offshore services such as routine software development and call center work that have more potential.

"If we're growing in a certain area, if we want to focus more resources on a specific geography or industry, we need to be able to shift our resources there fairly rapidly," said EDS spokesman Jeff Baum. "We need to have the ability to move work to where we do it best, and that takes a little while to develop."

An analysis by Sanford Bernstein's Rod Bourgeois shows a direct correlation between a company's growth and the percentage of its workers offshore. For example, traditional companies, such as EDS and International Business Machines Corp., with a lower percentage of offshore workers can expect a growth rate of about 3 percent over the next year. Those with more than 20 percent of their labor forces in low-wage offshore facilities – such as Plano-based Perot Systems Corp. and Dallas-based Affiliated Computer Services Inc. – can expect to grow at a rate of 12 percent in the next year, Mr. Bourgeois said.

And Indian-based computer services firms may grow at a whopping rate of 29 percent.

U.S. companies are responding quickly to the trend. By the end of next year, about 830,000 U.S. service jobs will have moved offshore since 2000, according to one oft-cited forecast by Forrester Research. Offshore labor, at its simplest level, gives technology services companies a way to slash costs.

A typical U.S. company that starts using offshore labor in 2005 will spend nearly 75 percent less on each offshore employee by 2010 than it will spend on each U.S. employee, according to research by Dallas-based industry consulting firm Trowbridge Group. That figure includes the costs of outfitting and powering the employee's workplace.

The gap remains large even if the U.S. dollar devalues significantly or if labor costs climb rapidly in offshore locales.

The divide is simply too compelling for the clients of outsourcing companies to ignore, even if their emotions tell them to preserve U.S. jobs, said Ben Trowbridge, the consulting firm's chief executive.

"There's no logical reason not to do it other than you perhaps have a unique business reason," Mr. Trowbridge said.

Plenty of offshore firms, such as Indian giants Tata Consultancy Services, Infosys Technologies Ltd. and Wipro Ltd., are willing to do the outsourcing work if U.S. firms won't. Some U.S. companies have even set up their own internal facilities in offshore locations instead of outsourcing the work.