Re: Book on Offshore Outsourcing

From: Straydog <asd_at_panix.com>
Date: Thu, 31 Aug 2006 20:05:00 -0400
Message-ID: <Pine.NEB.4.63.0608312004450.29835@panix1.panix.com>

Offshore outsourcing (i.e. BPO, especially to India) has a high failure rate and is leading to a new pheonmenon: backsourcing/backshoring, and the "H-1B swindle."

July 4, 2006 revision: Adds WSJ article at item #16

June 26, 2006 revision: Adds Business Week/Small Biz, Summer, 2006 report (see item #15)

June 12, 2006 revision: Adds BW article reference on Apple pulling out of India (see item #14)

June 6, 2006 revision: Adds one question (#4) about economic conditions in India and references (in item #13, below).

May 5, 2006 revision: Companies hiring foreigners on H1b visas are less interested in quality work and more interested in cheap labor (see item #12 below).

FAQ:
QUESTION #1: How well is offshore outsourcing & BPO (especially to India) really working?
ANSWER: Below are many different sources (1-11, 14-16) and many comments, summaries, and quotes that report that the failure rates are very high and satisfaction is not very high, either. Especially in reference # 10, it is clear that you don't get increased "productivity." Instead, when the cost goes down, so does the quality of what comes out.

QUESTION #2: Instead of offshoring jobs to, for example, India, US companies import foreign labor to the USA through a visa such as the H-1B which requires that the employee work only for the company that sponsors that visa and they justify this on a shortage of IT expertise in the USA. How true is this picture?
ANSWER: Reference #12, below, is a source of information that H-1B employers are more interested in cheap labor than quality service or products.

QUESTION #3: Are there any anti-offshoring internet resources? ANSWER: See at the very end of this file, one website. If you know of any more, please send email to me or post to the newsgroups.

QUESTION #4: What BPO economic changes are currently being reported for India?
ANSWER: See item #13, below.

From WSJ, Monday, July 3, 2006, page B1, entitled "Siting a Call Center: Check Out the Mall First" by John Lyons.

Quote(p B3): "After Lehman Brothers moved its internal computer help desk to India in 2003, the mismatch between the investment bank's hard-charging employees and their new Indian phone-support agents created problems, say industry insiders, and the help desk returned in house."

It is also interesting that most of this article is about an Indian, Mr. Shankardass, a US citizen ("born to Indian parents in Nairobi, Kenya") who works for ClientLogic, that sets up call centers as an outsourcing business and most of the article is devoted to his work finding call center sites in Mexico.

From Business Week/Small Biz, Summer, 2006 (may be on the website: www.businessweek.com/smallbiz) entitled: "Here or There" subtitle: Six entrepreneurs explain why they outsource or not. Here is a quote from the first page of the article (page 67):

"Some 24% of small manufacturers said they had purchased goods or services
from vendors outside the U.S. in the past three years, according to a 2004 study by the National Federation of Independent Business. For the rest, the best place to manufacture is right at home, at least for now. The easy rapport with vendors, relatively short plane rides, and the quality of American-made goods keep these business owners and their customers perfectly happy."

Subject: More India BPO failure (in Business Week, June 19, 2006 issue, page 48):

title: "India: Why Apple Walked Away"
subtitle: "Plans for an Indian tech support center have been scrapped. A cautionary tale"
by Manjeet Kripalani and Peter Burrows.

Quotes:
"Just three months back, Apple ...[was talking about] hiring 3,000 workers
by 2007 [in Bangalore]...."

These plans are now cancelled and most of the 30 existing employees in Bangalore have been dismissed. The factors mentioned as working against the original plan include "Entry level pay at tech and outsourcing companies climbed by as much as 13% annually from 2000 to 2004, while salaries for midlevel managers jumped 30% a year during the same period...." Also cited as a problem was high turnover. Thus the financial advantage of sending work to India has just about vanished.

Quote from CFO magazine, June 2006, page 17 (may be on their website, cfo.com, I did not check): "Passing on India? Rising wages in India are eating into some of the cost advantages of sending work to the popular outsourcing destination. Wages have increased roughly 11 percent in each of the last three years with little sign of abating, says Michael Spellacy, vice president at The Boston Consulting Group. In major cities like Bombay and Bangalore, inflation has climbed as high as 14 percent, with worker attrition rates now averaging 25%. A full time worker in outsourced financial services in India earns between $22,000 and $27,000, Spellacy says."

Also, in The Economist, June 3rd, 2006 issue is a special report on India
"A Survey of Business in India" with the title "Now for the hard part" and
on page 6 of the special report (center section of the issue) is a large article ("If in doubt, farm it out") on the difficulty India is having finding workers for this great expansion in BPO service to the outside world.

The article "The H-1B Swindle" by Ephraim Schwartz, appearing in Infoworld, October 31, 2005, page 12, has the subtitle "A new study suggests that companies hire foreign workers for cheap labor, not skill." The article goes on to say: "It appears there is hard evidence to prove that employers are using the H-1B visa program to hire cheap labor; that is, to pay substantially lower wages than the national average for programming jobs (infoworld.com/3449)" The article goes into additional detail and cites data sources such as BLS (infoworld.com/3450) and DOL's H-1B website (infoworld.com/3451). Across the board, foreigners were being paid less. As a general fact, companies have a financial incentive to preferentially recruit foreigners because they know foreigners will accept a job offer at a lower wage.
A study show that outsourcing really does not save as claimed. http://www.boston.com/business/technology/articles/2006/04/13/ outsourcing_saves_less_than_claimed/

(this reference was posted on a newsgroup in early 2006, and was not checked)

Three more recent articles. First: the article "Don't Offload Big IT Problems On Outsourcers" by Rob Preston (VP.Ed-in-cheif) as appeared in Informationweek, April 10, 2006, page 88 (may be online at informationweek.com). Second: the large article "How Do You Spell Relief? O-U-T-S-O-U-R-C-I-N-G" by Bruce Boardman, appearing in Network Computing, April 1, 2006, pages 30-36, and a third article in the same issue on pages 39-48.

So what do these three articles say? The first is a one page qualitative review of several outsourcing failures and cites "Outsourcing Backlash" (presumably at informationweek.com/650/50iuout.htm [I have not checked it]) and explained that any problems people have at home become magnified when they offshore/outsource (many references to India).

The second walks people through the "process" of outsourcing/offshoring work, including a discussion of how to do this, but also has a sidebar on page 36 which includes a summary of a Deloitte Consulting survey of 25 organizations (worth $1 trillion in market cap, and with 1 mil employees, and spent $50 bil on operations outsourced) and the sidebar says things like: one in four brought functions back in house after realizing they could do the work better, cheaper themselves, 33% of outsourcing relationships failed in one year while 50% didn't last five years, and 57% paid extra for services they though were included in the original contract.

The third article also helps the IT specialist by evaluating four data center packages (from Savvis, EDS, Globix, and Infosys). There were a number of tables with data. Bottom line results: Infosys was the cheapest, EDS about three times more expensive, others midway; quality of results- Savvis and EDS got A-, Globix got B+, and Infosys got a C. You get what you pay for.

9. Courtesy of "indiabpoking" are the following reported negatives, failures and shortcomings of BPO, quoting his quote from the source given:

>From indiabpoking_at_yahoo.com Mon Apr 10 18:36:37 2006 Date: 10 Apr 2006 15:36:37 -0700
From: indiaBPOking <indiabpoking_at_yahoo.com> Newsgroups: alt.computer.consultants, alt.politics.economics,

alt.politics.bush, sci.research.careers, soc.culture.british Subject: Outsourcing seen as source of innovation

http://news.zdnet.com/2100-9595_22-6059512.html

"An IDC and Capgemini survey of almost 300 executives attending IDC's
Outsourcing Forum East last week found that top reasons for deciding to use Business Process Outsourcing in a corporate strategy include reducing costs, driving innovation, and the ability to focus on core competencies."

[but see below]

"Additional [negatives, failures, drawbacks] survey highlights include:"

"* More than one third (38.2 percent) of participants felt the biggest
downside to outsourcing is not getting the expected results, followed by public/customer backlash (23.5 percent), and anxiety over loosing control (20.6 percent)."

[note that 38.2 percent is much lower than other figures cited from other sources farther down]

"* The three most important legal issues concerning BPO today according
to those surveyed were: governance procedures (33.8%), business continuity (27.7 percent) and intellectual property rights (26.2 percent)."

8. More complaints about India:

from the article "View from Asia-India won't fully benefit from the amazing productivity of its companies unless it builds a better infrastructure for business" by Tom Leander (Editor-in-Chief, CFO Asia). Appearing in "CFO" magazine for April 2006, page 27 (may be at their website: www.cfo.com/backissues).

Some quotes:

"... GE's CFO, Keith Sherin, told CFO Asia late last year that he finds India
frustrating. 'You get excited and nothing happens,' he says. Three years ago, GE did about the same volume of business in both India and China. Today, China is a $3 billion market for GE, triple that of India. So, it's no surprise when Sherin sums up GE's Asian strategy by saying that 'China is number one, two, and three for us'."

"His primary complaint is the lack of government support for infrastructure
improvements. Turn off any highway in India and you'll know what Sherin is talking about."

"It may be unseemly to criticise a government that has to take care of so
many poor citizens for not building better roads to facilitate commerce, but India's CFOs point out that infrastructure is a social-welfare issue. Sumant Sinha, CFO of leading conglomerate Aditya Birla Group, says that he spends more on capital expenditure every year than peer companies in other nations might. How many of them, after all, must build their own power stations?"

"But its wishful thinking [despite all the positives of India] to conclude that
India's remarkable productivity will translate into a thriving internal market any time soon. In the eyes of most U.S. finance chiefs, China remains number one, two, and three."

7. Backshoring...the new buzzword

Feb 13, 2006 issue of Infoworld, pages 8 (Efraim Schwartz's column) and page 4, (editor's);

Developer poaching and rapidly rising prices are causing US based companies to start pulling jobs back to the USA. Read about it in the periodical.

6. Subject: Deloitte Report: outsource failure rates

From June, 2005, CFO magazine, page 19.
(it may be on their website, www.cfo.com/BackIssues)

Deloitte Consulting was said (by the CFO article) to have said "'In the real world, outsourcing frequently fails to deliver its promise.' wrote researchers who surveyed 25 companies with average revenues of $50 billion. The study reveals that 70 percent of its respondents have had significantly negative experiences and are outsourcing business processes and IT with increasing caution."

"...there is growning evidence that large comapnies are rethinking massive
outsourcing contracts. Big name defectors that have unwound at least part of their arrangements include Conseco, Dell, Capital One, and Lehman Brothers."

"A sure sign that outsourcing isn't working is the amount of renegotiation
surrounding the vendor agreements, sayd Deloitte senior strategy principal Ken Landis. 'There wasn't a single participant in the study wohe contract went to term,' he says. 'All of them had renegotiated prior to the contract expiration date'"

"Companies are souring on outsourcing, the survey asserts, for the same
reason it has been criticised for years: failure to live up to cost-reduction promises, risks to intellectual property, and confidentiatlity, and lack of transparency."

The article states that, so far, 25% of the companies have brought services back (now called backsourcing).

5. From Information Week, page 8, in the Nov 21, 2005 issue.

Sidebar: "48% of all companies will spend more money on BPO this year than in 2004"

"55% of current BPO service delivery is conductend inside the USA"

"41% of companies are satisfied with their BPO services"

So, that sounds like 100 - 41= 59% are dissatisified with their BPO services. And, there's going to be more BPO?

Says the source is IW, Managing Offshore, and Equa Terra study of 200 BPO customers.

4. "Offshoring isn't such a sure thing"
by Lora Kolodny,
Inc. magazine, September, 2005, pages 22-24

Quotes:

"Companies are finding that sending IT work overseas can
be more trouble than it's worth, according to a new survey from DiamondCluster International, a Chicago-based management consultancy. The number of executives surveyed who said they were pleased with their outsourced IT vendors fell by 17 pecentage points versus the previous year, marking the first decline since 2002. Moreover, early termination of relationships between buyers and offshore service providers spiked to 51%, which is double the rate of 2004."

In other words, half of all relationships are terminated before their first contract period is up.

In view of this, a spokesman for the consulting firm says that "...tech buyers will think twice about sending critical services abroad--at least for now."

3. From "CFO" magazine, FALL 2005, special issue, pages 40-44. (may be on www.cfo.com/Backissues)

article: "Customer Disservice: Critics say the promised savings from offshoring come at too steep a price, while companies say very little at all"

by Norm Alster

some content and some quotes:

This article starts by saying that on a recent talk show where people could call in with comments and questions, it was discovered that virtually everyone in the USA does not like foreign call center representatives.

"But the practice of outsourcing customer service to
offshore call centers is beginning to look like a classical idea carried too far. Critics of the pracctice point to a growing body of evidence that suggests faulty economics and customer dissatisfaction are forcing a rethink of what once seemed a no-brainer."

"'The economic benefits of outsourcing customer service
are grossly overstated' according to Niels Kjellerup, a senior partner with Australian consulting firm Resource International and editor of a Website devoted to call centers (www.callcenters.com.au). Customer resistance, along with data-security concerns and the unexpectedly high costs of managing offshore call centers, offset and dilute their promised economic benefits, says Kjellerup."

"There is already evidence that these factors have
combined to slow the offshore migration. Several large firms, including Dell, credit-card giant Capital One, and insurer Conseco, have shifted at least some customersupport operations back to the United States."

Gartner's analyst, Robert Brown, says that the initial large growth in offshoring is expected to be, in the future, much much smaller.

"Companies with monopolistic or overwhelmingly dominant
market positions are more apt to risk customer alienation where near-term savings can be realized."

"Alexa Bona, a Gartner analyst based in London, predicts
that during the next three years, up to 60 percent of companies outsourcing customer-facing service will encounter customer defections and hidden costs that will either cancel or outweigh any perceived savings in such arrangements."

"He [Chris Selland, at Covington Associates in Boston]says
executives at firms that have employed offshore call centers keep telling him that 'it's harder, it takes more management attention, and you have to be meticulous about the way you structure the agreement.' As a result of all this unexpected overhead, the projected savings from offshoring can swiftly evaporate."

The article says there is huge turnover at Indian call centers; it can be up to 70% per year. And, with the big expansion, there have been recruiting wars in India and escalating pay scales.

"Martha Rogers, a consultant and author of several books
on customer relationships, contends that the metrics generally used to measure call-center performance are flawed."

"Many companies that outsource customer service, in fact,
don't like talking about it, and more than a dozen turned down requests for interviews. 'Companies are looking to do everything they can to hide the fact that they are using off shore call centers' says Selland. 'From a political standpoint and a customer-acceptance standpoint, it is something they are trying to downplay.' At some Asian centers, agents are actually trained to conceal their real names and adopt phoney American monikers, a practice that fools few and can further inflame an already angry caller."

"One in three respondents in a British survey said they
would stop doing business with a bank that relocates its call centers offshore. Another study, conducted in 2004, reported that just 5 pecent of the British are satisfied with offshore call centers. The Irish arm of Sweden's Tele2AG, a telecommunications firm, recently switched its call center operation out of India and back to Ireland, citing consumer preference."

"In an unpublished data-theft case now under investigation,
a large U.S.-based technology multinational contracted with a call center in India without knowing that that company in turn subcontracted a portion of the work to firms outside India, where employees of the subcontractor apparently managed to penetrate the American company's information database."

"...growing outsourcing industries in Eastern Europe and
Latin America have been targeted by criminals seeking access to customer data. "

"'For companies that regard customer service as a key part
of future revenue growth, bringing such operations back to domestic shores is the way to go,' says Kjellerup."

2. From _Information Week_, page 60, Dec 19/26 issue, 2005

A short article by Paul McDougall reporting that: "...companies operating in India, including local ones such as Infosys Technologies, Tata Consultancy Services, and Wipro Technologies, spend a lot of time and energy time stealing each other's employees--and that's quickly driving up salaries" and "'There's a lot of employee turnover [in India], and we weren't interested in that,' says Martin Mellon, director of development at applications vendor ASG Software Solutions. The company chose Northern Ireland over India for its offshore development work."

Subject: "Satisfaction Wanes for Offshoring"

On page 2 of the print issue of Processor.com for June 17, 2005, volume 27, number 24:

"According to consulting firm DiamondCluster International, the number of
buyers satisfied with the providers of their offshore outsourcing has fallen from 79% to 62%. The firm's annual survey of IT outsourcing also revealed that 51% of buyers are terminating their outsourcing relationships earlier than scheduled."

An anti-offshoring website (excerpted from a 2006 newsgroup posting):

Subject: US IT Out Web Site (Anti-Offshore-Outsourcing) (fwd) From: Vladimir Veytsel <VladV_at_verizon.net> Newsgroups: alt.computer.consultants, alt.computer.consultants.ads

Link :  http://it.davar.net  or  http://davar.net/IT
Name :  US IT Out - USA Information Technology Outsourcing
Descr:  Selection of anti-offshore-outsourcing quotes,
           opinions, cartoons and links.
           (On most part changes are uploaded at month end;
           updated sections are marked by colored dates.)

About        Short introduction that explains the purpose,
                the origins, and the structure of the web site.

Advice       Quotes that offer advice on what one can do
                to oppose the offshore outsourcing.

Quotes       Quotations selected mainly by the following criteria:
                1. Random  historic quotes (mostly by the US presidents).
                2. All USA historic quotes (mostly by the US presidents).
                3. Condensed viewpoints that are well taken.
                4. Representative statements showing "who is who"
                   relative to the offshore outsourcing issue.

Opinions     Opinions selected on most part from the
                "alt.computer.consultants" news group.  Just linking
                to them would be clumsy and not quite reliable, and
                could result in losing them if they were deleted from
                the news group archives.  A few opinions were selected
                from the media, again for the sake of keeping them in
                case they were deleted from the media site archives.

Books        Short reviews of books that describe and analyze the
                offshore outsourcing phenomenon, and related subjects.

Cartoons     "One picture is worth thousand words" - especially if
                it's a good cartoon.  Treating a topic that is anything
                but a fun with a smile (though a sad one) serves as a
                healthy add-on to the mostly depressing content of this
                web site.

IT Links     Classified links to information about the offshore
                outsourcing of information technology jobs by
                USA-based companies.

USA Links    Classified links to information about USA events
                (some links here are related to offshore outsourcing).

World links  Classified links to information about world events
                (some links here are related to offshore outsourcing).

-- 
Best regards,
Vladimir Veytsel
http://davar.net
http://it.davar.net

Received on Thu Aug 31 2006 - 19:05:00 CDT