Offshore Outsourcing and the OS/400 Ecosystem

“I think that just about every tech company has considered the use of offshore outsourcing resources to reduce costs,” says Henry Martinez, chief technology officer for Vision Solutions. If that is true (and I believe it is), most of them–at least in the iSeries world–aren’t talking about it. In the course of preparing this article, I contacted approximately 25 iSeries ISVs, most of them sizable, and almost all of them took a pass. The standard reply went something like, “Thanks for considering us, but we have no comment on this topic. Please consider contacting us in the future for other topics.”

Perhaps it’s understandable. In 1925, then-President Calvin Coolidge said, “The business of America is business.” A 21st century update of that statement might better be phrased more specifically, “The business of America is increasing shareholder value.”

Even given the more-or-less acknowledged truth of Martinez’ claim, offshore outsourcing remains a highly charged topic. It’s in just about everyone’s best interests that companies keep a tight rein on costs to boost the bottom line, and that can drive the consideration of the use of offshore resources. At the same time, farming out work to India, China, or any number of other countries with burgeoning outsourcing businesses is often deemed to be “un-American” because it ostensibly takes jobs away from Americans.

It’s noteworthy that not too many people get riled when companies like America Online offshore functions like their help desk support. (Which, by the way, I’ve had several occasions to use. The results are highly impressive.) Those types of relatively entry-level jobs must seem somewhat more expendable to those who clamor for retaining jobs here at home. But just mention sending application development offshore, or even maintenance, or heaven forbid, research and development, and the flags start to wave.

It goes without saying that no company looks forward laying off staff and sending jobs to foreign lands. But when that’s what must be done to stay competitive or to increase reinvestment dollars, it’s understandable. Yet companies still are hesitant to talk about that great big outsourcing elephant in the corner–and it’s a darned big elephant. Apparently most of them believe it’s better to stay off the record.

Indeed, I was not even able, despite several attempts, to get through to IBM on this topic, despite its announcement earlier this week that it will be moving all of the solutions design and development for its SOA-based business consulting offerings to the new Global Business Solutions Center in India. IBM already has 38,500 employees in India, up from 23,000 just one year ago, according to InformationWeek, which also reports that this, “rate of growth will continue for quite some time. . . . If it does, IBM would have more than 60,000 workers, or about 20 percent, of its worldwide workforce in India by next year. The company employs about 150,000 workers in the U.S. but has been quietly eliminating a number of domestic positions in recent months.”

Still, not everyone is avoiding discussing the issue, and a few brave souls were willing to share assessments of offshore outsourcing and the impact it has and will continue to have on our industry, especially in the iSeries space.

As an example of the new global-based economy that is blurring more traditional national and continental lines, Coglin Mill, an Australian-based company, does all of its development work in its headquarters country, despite its large U.S.-based office in Rochester, Minnesota. Pete Wangen, sales and marketing director, notes that Australia has a pool of talented iSeries resources that lets Coglin Mill manage all of its development in a centralized location. The only reason, he says, that the company might use another offshore resource would be if it had a large project with a customer in another part of the world, and if it made good business sense to do so.

“Outsourcing is a reality in today’s global and competitive landscape,” says Wangen. “While it creates more competition, it also pushes us in the U.S. to improve our skills and to become more focused on delivering quality products and services. The global marketplace also creates new opportunities for U.S. companies’ products and services, thus opening a larger market for everyone to participate. In order to succeed in the future, we have to embrace this reality, focus, and move forward now.”

Vision Solutions’ Martinez freely acknowledges that his company does make use of both onshore and offshore resources–but only in select situations. “High availability is such a particular and mission-critical niche that we do not want to add that risk to our customers,” he explains. “So our outsourcing is limited to commodity coding that is not part of our core competency. Items like internalization of screens and menus have been outsourced. Typically, we find companies that specialize in commodity program areas instead of trying to find the cheapest alternative. With that, our outsourcing has frequently landed in U.S. companies that are chosen on the merits of their capabilities. We’ve found other ways to reduce costs, such as through smart and strategic acquisitions. But we are a global company with many international customers, so we do, however, outsource translation and localization services for our software to increase international ease of use.”

On the other hand, Schadd Gray, chief technology officer for ProData Computer Services, reports that his company has not considered outsourcing. “Though the hourly rate for offshore labor is less expensive, the overall cost incurred because of communication problems, time-zone issues, and inability to track work and progress double if not triple the hourly rate of a developer.

Gray believes that the hourly rate cost savings will vanish in the face of other costs incurred. “To many business owners and IT managers, the value of offshore resourcing is the low cost–some as much as a third of what it would cost locally. However, once you add in the onsite liaison you would need to coordinate the resources as well as translate the language barrier, and you add additional hours to the project to compensate for the lack of experience, you do not end up saving any money. In most cases, it ends up costing you more, and money has been lost from the local economy.”

Daniel Kuperman, director of marketing for Quadrant Software is also skeptical about the potential cost savings. Thus far, his company has not considered using offshore resources, and he holds to the belief that their internal development team has such a deep understanding of the company’s products that they do not see the benefit of outsourcing to another country, even if in the short-term the labor costs would be lower. “We pride ourselves for high quality products,” Kuperman says, “and so far the only way we have been able to maintain that is by hiring the best people and keeping them happy. They are the experts on what we do and how we do it, and transferring that outside is both daunting and risky. Price is a good motivator, but we like to look at the whole equation. Unless the price justifies the risks (which today we think it doesn’t), it is not a viable option.”

It’s true that, to some extent, the bloom is off the offshore outsourcing rose. Many companies are beginning to report some of the offshore horror stories, and a few companies have even brought work back onshore after experiencing contracts and relationships with less than satisfactory results–generally tied to mismanagement of communication and project administration. Buying commodity programming (or help-desk resources or just about anything else) gives you just that–a commodity. You can’t expect that project management happens by magic or that people who speak a different language at the dinner table each night will instantly absorb the nuances in your documentation that even your own staff here at home has difficulty deciphering. Bad stuff is going to happen, and the management issues are different from those companies are used to experiencing. It should surprise no one, when major outsourcing contracts within our own borders often go bad, that offshore outsourcing arrangements don’t fare any better.

Still, no one is predicting that offshore is going away. Quite the contrary, we all (on both sides of the equation) will get better at it, and it’s going to continue to grow at a steady pace. A recent report issued by the Association for Computing Machinery, entitled “Globalization and Offshoring of Software,” includes, among others, the following findings:

• “Globalization of, and offshoring within, the software industry are deeply connected and both will continue to grow. Key enablers of this growth are information technology itself, the evolution of work and business processes, education, and national policies”
• “Both anecdotal evidence and economic theory indicate that offshoring between developed and developing countries can, as a whole, benefit both, but competition is intensifying”
• “Skepticism is warranted regarding claims about the number of jobs to be offshored and the projected growth of software industries in developing nations”
• “Standardized jobs are more easily moved…than are higher-skilled jobs…. Today, global competition in higher end skills, such as research, is increasing”
• “Offshoring magnified existing risks and created new and often poorly understood addressed threats to national security, business property and processes, and individual privacy. While it is unlikely these risks will deter the growth of offshoring, businesses and nations should employ strategies to mitigate them. “

Vision Solutions’ Martinez “most definitely” agrees that offshore outsourcing will continue to grow. “Businesses do seek out cheap labor and will continue to do so. What is interesting and helpful now is that businesses are setting up American-run interfaces in the U.S. to make their offshore resources more user-friendly. This level of project management is quite helpful.”

Quadrant’s Kuperman also predicts continued growth, “especially in places like Latin America and Eastern Europe. The political scenario of some regions might contribute to the pace in which offshore outsourcing takes place. And, as more and more money is diverted to these countries, the prices will start to rise (it seems that is already happening in India), changing the equation once more. Offshore outsourcing is not a fad. It will continue to grow, and will probably be commonplace five years from now, provided the countries offering the services keep a stable political situation and that they can provide increasingly good service.”

What will be the impact on American jobs–the issue that is, of course, the biggest topic that causes companies to avoid making public statements and talking to reporters? While it may be no consolation to a maintenance programmer or a help desk consultant whose job has just been sent to India, there is evidence that the impact on the overall number of jobs in the technology sector might not be as great as some might suggest. Right now, at least, one of the hottest job markets in the U.S. is in information systems and technology, as American companies claim they are having trouble staffing.

In fact, the ACM study reports that the annual job loss that is tied to offshore outsourcing is between 2 to 3 percent of the IT workforce, but the organization maintains that “the number is small compared with the much higher level of job loss and creation that occurs every year in the United States.” As long as the number of IT jobs is growing at a rate faster than the number of jobs moving offshore, job loss in the aggregate should not be a concern.

The report offers sound advice for students and IT workers for improving their chances of long-term employment in IT occupations, who should take the steps of, “obtaining a strong foundational education, leaning the technologies used in the global software industry, keeping skills up to date throughout their careers, developing good teamwork and communication skills, becoming familiar with other cultures, and managing their careers so as to choose work in industries and job occupations less likely to be automated or sent to a low-wage country.”