The pros and cons of offshore outsourcing

If you are a budget-conscious IT director, the mention of offshore outsourcing may bring a smile to your face. For software programmers or call centre workers, the reaction is likely to be more negative.

Last week vnunet.com's sister title Computing published research by analyst Ovum Holway stating that up to 25,000 jobs in the UK software and services industry will be lost over the next four years as a result of work moving overseas.

But for businesses, the option of offshore services is increasingly compelling, with savings of up to 50 per cent being achieved by companies such as British Airways, Standard Chartered Bank and HSBC, which were among the first to use overseas providers.

According to Ovum Holway, the offshore sector is booming. Last year, it grew 27 per cent in the UK, bringing revenues to £545m, and it is expected to top £1bn by 2006. Such growth compares favourably with the flat market in most other sectors.

But sales figures are still only two per cent of the total UK software and services market. By 2006, the offshore sector will only account for five per cent, but among big users and major vendors the influence of offshore is disproportionately large.

All of BA's back-office ticketing operation is run in India. Much of the software development for London's controversial congestion charging system has been completed overseas. Even BT is considering moving some of its call centre operations to the sub-continent.

Standard Chartered has indicated that locating facilities and recruiting more than 2,000 staff in India for its global helpdesk, IT and software support resulted in significant business benefits.

"We have seen savings of 50 per cent in terms of salary cost, and the only downside is international telecoms, where costs are higher," said Simon Bush, head of the global shared service centre at Standard Chartered.

"There is no shortage of the right people to do the jobs and the productivity of the people is higher than expected."

Online travel provider Ebookers claimed that it is saving £1m every three months by moving back-office operations to Delhi, where 350 employees provide telesales, billing and customer services.

And when HSBC outsourced some of its call centre operation to India last year, chief executive Sir Keith Whitson claimed that the overseas staff provided a better service than UK workers.

And it's not just business users that are being forced to sit up and take notice of what offshore can offer.

IT suppliers in the UK and US are changing their strategies to respond to the cost and quality that indigenous overseas vendors are offering.

Capita works closely with Mastek in India; Microsoft is investing in China; and EDS last year launched its 'Best Shore' initiative looking to combine local and overseas resources to offer customers the best of both worlds.

EDS chief executive Dick Brown confirmed that the vendor is making a "multimillion dollar" investment in contact centres in India, with its first due to go live in Bombay this year.

He should be well aware of what is happening overseas. With the US stock markets depressed, Infosys, one of the top three Indian vendors, has a higher market capitalisation than EDS.

But Ovum Holway analyst Phil Codling warned that, despite the impressive growth and increasing influence of offshore services, users and suppliers should not get carried away just yet.

"The sky is not the limit," he said. "The overseas companies are highly rated and profitable, but their overall scale is still nowhere near the big league. What we are seeing from the mainstream IT industry is a significant shift. Offshore is on their mind."

Codling added that overseas suppliers have been able to undercut UK prices by as much as 40 per cent and still remain profitable. Equally, UK suppliers can ease the pressure on their own margins by sub-contracting work abroad.

India is by far the best known and most successful location for offshore services - it has 95 per cent of overseas sales in the UK - but other developing countries are building up their facilities.

The Ovum Holway report identified China, the Philippines, Vietnam, South Africa, the Baltics, eastern Europe and Russia as countries growing their offshore revenue.

But the most contentious issue will remain the impact of overseas workers on UK jobs.

Indian call centre operators earn the equivalent of about £2,200, compared with about £15,000 in this country, so companies will find it difficult not to consider the cost benefits.

Trade unions are leading the backlash. When insurer Prudential announced 850 job cuts last year as part of its plan to transfer call centre work to India, a high-profile campaign by Amicus forced the company to back down on compulsory redundancies.

Overseas staff will find it harder to work in the UK since the Home Office removed IT skills from its list of jobs eligible for 'fast-track' visas last autumn.

The only area unlikely to make extensive use of offshore providers is government, because of potential political consequences.

But Codling suggested that the shift overseas is unstoppable. "Offshore providers will win out as they have in the manufacturing industry," he explained.

"The IT industry is so squeezed on margin and price, that they have no option but to do things as cost-effectively as possible.

"It is possible to see an upside for the industry, if it is prepared, but in terms of jobs in the UK it's hard to say anything positive.

"If quality work can be done to time and remain cheaper, people will do it. I can't see that this trend won't continue. It's a fundamental shift. It is going to happen."

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