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Offshoring & Outsourcing in 2009: What Does the Future Hold?

By Stephanie Overby , CIO , 12/18/2008

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All things considered, 2008 was a relatively stable year for the IT services industry. Deals got smaller and shorter, but they grew in number. The second tier providers and Indian vendors did well, along with Accenture and IBM Global Services. The outlier was EDS, where weakness led to its acquisition by Hewlett Packard.

IT outsourcing providers were largely unscathed by the economic downturn throughout much of the year. "It took almost two quarters for the effects of the slowdown to manifest in providers' financial statements," says Eugene Kublanov, CEO of San Ramon, Calif.-based outsourcing advisory NeoIT. By the end of this year, however, CIOs became too distracted by the economic destruction surround them to do any outsourcing deals. "As the markets crumbled and CIOs were confronted with the prospects of their personal employment, naturally, decision-making around strategic cost cutting and efficiency took a back seat," says Kublanov.

That's all poised to change in 2009. The only problem is, that may be bad news for both IT services providers and their IT leader customers.

Back to the Future: More-Not Better-Outsourcing

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"Whenever there's a downturn people outsource more, not less," says Gartner analyst Linda Cohen. "Organizations want to take costs out wherever they can. CFOs are pounding on their CIOs to just outsource it, just offshore it."

"The difficult economic conditions will push companies further than before to consider what stays in house and what gets done by others," agrees NeoIT's Kublanov. "Additionally, demands by the business for further cost reduction will need to be addressed in an environment where many companies have already leveraged labor arbitrage to source the low hanging fruit."

CIOs may sign hasty deals for a short-term returns. In a case of what Cohen calls "convenient amnesia," IT leaders may forget all the lessons they learned rushing into bad outsourcing arrangements and chasing elusive benefits. "Everyone has a gun to their head right now," she says. "But the financial voodoo of outsourcing deals doesn't work. You have to accept the reality that if you hand your mess over to a vendor, you're going to eventually have to pay for that burden they take off your plate. You can pay it now or pay it later, but you're going to have to pay."

Bad deals can lead to degradation in service performance and price increases down the line. Smart buyers will ask for shorter term lengths, but in times of economic pressure rational thinking is hard to come by. "People do bad deals for short-sighted reasons," Cohen says. "We've seen it before and we'll see it again."

For Vendors: Pain at the Margins

Service providers will be only too happy to sign on any new business in 2009. "They're chasing the albatross of quarter-to-quarter earnings," says Cohen. Outsourcers may do anything for revenue, even if it's outside of their sweet spot. It'll be like 2001 all over again. "It looks like good revenue, but in the later years, the provider starts to see profit problems," says Cohen. Then the customer starts getting his "A" team replaced by a "D" team, prices creep up, everything is a change order."

Providers with cash will be king, giving Indian vendors the upper hand. They may try to buy up second-tier companies in the U.S., Europe and Asia, or buy into deals at a discount, just to get a foothold in the U.S. They will even buy up customer assets, something they've been unwilling to do in the past. "They'll do anything for cash," says Cohen. But as with any other contract, "a deal that looks too good to be true will read better than it lives."

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But the offshore providers will face the additional pressure on their margins as the dollar continues to depreciate.

Outsourcing Innovation: Transformation? What Transformation?

Remember all that talk about how an IT services provider could be your partner in innovation? Forget about it.

"The focus will shift away from open-ended efforts," says Stan Lepeak, research director of outsourcing consultancy EquaTerra. "Buyers will not have much appetite for transformation in 2009."

"Innovation or big solution implementations will slow down dramatically," agrees Cohen, "unless you prove I'm going to get back in cost improvements a lot more than I put out and it would have to be a pretty rapid ROI for any transformation."

One Bright Spot: The Sustainability of Green

Although outsourced innovation will be set aside in 2009, the greening of IT outsourcing deals will not... if only because sustainability can mean cost savings. "Purely environmental desires will take a back seat to explicit cost savings desires," says Lepeak of EquaTerra. "But green that hits the bottom line will flourish."

The only question is-who will see that benefit on their bottom lines?

"There will be a push by buyers on service providers to lower their cost of operations by employing green techniques and pass that savings on to the buyer," says Cohen. "Service providers are trying to go green for own profitability. Buyers will push for that to become a cost improvement for themselves rather than a profitability and performance for the vendor."

All contents copyright 1995-2008 Network World, Inc. http://www.networkworld.com

Harris assists State with outsourcing services

12/18/08 -- 11:52 AM
By David Hubler

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Harris Corp. will provide outsourcing services to the State Department under a three-year task order that has a potential value of $8 million.

The award calls for Harris to provide desktop support, help desk support, knowledge management, training and asset management services for up to 37,000 desktops at 28 offices of State's Bureau of Information Resources Management.

The contractor provides similar IT support services to several State Department bureaus.

Harris is a member of Pragmatics Inc.'s team, which was selected by the department to execute the Vanguard 1.0 program. The program launches the IT consolidation initiative within State's Information Resources Management bureaus, said Wayne Lucernoni, vice president of civil federal operations at Harris IT Services.

Pragmatics, of McLean, Va., awarded the task order to Harris under its $99 million Hybrid IT Services for State contract that was announced in September. It is expected to be the first in a series of IT consolidation initiatives planned at State, Harris officials said.

Harris, of Melbourne, Fla., ranks No. 13 on Washington Technology's 2008 Top 100 list of the largest federal government prime contractors.

How People in India Really Live

	Examining Literacy Using India's Census India's Population: Reconciling Change and Tradition Is Delhi India's Largest City? Sex Ratio at Birth Begins to Improve in India

by O.P. Sharma and Carl Haub

(December 2008) Media reports on the "exploding" middle class in India would lead any reader to believe that Indian society is undergoing a top-to-bottom transformation into a society of Western-style consumers. A recent Business Week article quoted a McKinsey Global Institute study that claimed that India, in one generation, would become a nation of upwardly mobile middle-class households, consuming goods ranging from high-end cars to designer clothing. In two decades, India would pass Germany as the world's fifth-largest consumer market, the article went on. That, in fact, may not be much of an achievement given that India has 1.2 billion people and Germany 82 million! While it is certainly true that even small percentages give rather large numbers in India, a more realistic assessment of the true situation is needed.

Is India's middle class surging? We first need to consider the term "middle class," which can convey a variety of images. Those in the West undoubtedly have a fairly clear idea of what they mean by it. In this article, we will not try to define the concept for India but we will take a look at how the average Indian household actually lives. Readers can draw their own conclusions.

Visitors to India who may have spent all of their time in New Delhi might well return home believing India had "arrived," and that the middle class was thriving. While poverty is always visible in the city, the number of new cars and SUVs, shopping malls, and tony restaurants would leave a lasting impression. Even so, just 7 percent of households in Delhi owned private cars according to the 2001 Census. And this affluent city contains just over 1 percent of the country's households. Most of India's population lives in smaller cities or rural areas in extremely simple housing and with few modern amenities.

Household Expenses and Living Conditions

There are two principal official sources for information on such topics as household amenities and consumer expenditures, the decennial census and the National Sample Surveys (NSS) taken by India's National Sample Survey Organization. The NSS measures monthly per capita expenditure (MPCE) for households each year. MPCE consists of both cash household expenditures for different classes of goods and services and cash equivalents since barter is quite common in the rural areas.¹ Actual money income is not asked in the census or in the NSS.

In 2006-2007, the average MPCE in the rural areas, where most Indians live, was 695 rupees or about US$14. In urban areas, it was 1,312 rupees, or about US$27. About 52 percent of MPCE was spent on food in rural areas, while the same figure was 39 percent in urban areas. Housing costs for owner-occupied dwellings are excluded because so many people have constructed their own homes and, in a sense, live rent-free. These estimates do not take into account different price levels in urban and rural areas, but they do provide a rough idea of the level of living.

Large Households

The 2001 Census provides a detailed look housing conditions and living standards. In 2001, there were 138 million rural households and nearly 54 million urban households. It is worthwhile to remember that, although India is often referred to as a billion-strong market, many purchases, such as refrigerators, are peculiar to households. India's households include more people than they do in the United States and other Western countries, so a billion people does not translate into as large a market for household goods as it would in Western countries. In 2001, the average Indian household consisted of 5.4 people in rural areas and 5.2 people in urban areas. The average was just 2.6 people per household in the United States in 2001.² Thus, although India's population is about four times the size of the U.S. population, it has less than twice as many households. India had 192 million households in 2001, compared with 108 million in the United States.

Mud Floors and Walls Common

In 2001, nearly 110 million of India's households lived in dwellings with a mud floor, 72 percent of rural households and 18 percent of urban households (see Table 1). This represented an improvement over the 1991 Census in which 79 percent of rural households and 27 percent of urban households lived with mud floors. Urban houses are, as one might expect, more solidly constructed and more permanent.

The census also lists 50 percent of houses as being in "good" condition, 44 percent as "livable," and 6 percent as "dilapidated." The figures are somewhat better in urban than in rural areas. The overall picture these data show is certainly at odds with a Western view of the middle class. And, the census data do not capture the small size of most houses or their vulnerability to the elements.

---

Table 1
Percent of Households in India Living in Houses With Given Construction Materials, 2001

Construction materials	Rural households		Urban households
	Millions	Percent	Millions	Percent
All households	138.3	100	53.7	100
Walls
Grass, thatch, bamboo, wood, etc.	17.5	13	2.1	4
Mud, unburnt brick	54.9	40	6.9	13
Brick (burnt)	47.3	34	36.5	68
Stone	14.5	11	3.6	7
Other material	40.9	3	4.6	9
Roof
Grass, thatch, bamboo, wood, etc.	38.3	28	3.7	7
Tiles	51.9	38	10.6	20
Metal, asbestos sheets	13.6	10	8.7	16
Concrete	15.2	11	22.8	42
Stone	8.6	6	3.9	7
Other material	10.5	8	4.1	8
Floor
Mud	100.0	72	9.7	18
Cement	25.0	18	2.6	48
Stone	6.2	5	4.9	9
Mosaic, floor tiles	3.0	2	11.0	21
Other material	4.2	3	2.2	4

 

Source: 2001 Census of India.

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Few Household Amenities

Seventy-eight percent of rural households lack a latrine within the house, while less than half of urban households have a flush toilet, or water closet. Only 24 million out of 192 million households have a proper sewage connection (see Table 2). A majority of households use firewood for cooking although LPG (liquid petroleum gas) is widely used in urban areas. The NSS indicates that the proportion using firewood for cooking did not change from 1999-2000 to 2006-2007, although there was an increase in LPG use in both rural and urban areas. Although it is often commented that television ownership is commonplace even in high poverty countries, nearly 63 percent of Indian households did not have one. In villages, however, many televisions are shared by multiple households so that viewership is larger than census data would suggest. Among the most popular programs are cricket matches, religious programs, and game/talent shows.

---

Table 2
Percent of Households in India With Certain Necessities or Amenities, 2001

	Rural households		Urban households
	Millions	Percent	Millions	Percent
All households	138.3	100	53.7	100
Toilet within house	30.3	22	39.6	74
With water closet	9.8	7	24.8	46
With pit latrine	14.2	10	7.8	15
Other latrine/toilet	6.2	5	7.0	13
No toilet within house	108.0	78	14.1	26
Type of drainage (sewage)
Open drainage	41.9	30	23.3	43
Closed drainage	5.4	4	18.5	35
No drainage	91.0	66	11.9	22
Availability of kitchen within house
Available	82.2	59	40.8	76
Not available	36.1	26	9.7	18
Cook in open	19.7	14	2.9	6
Fuel used for cooking
Firewood	88.6	64	12.2	23
Crop residue	18.1	13	1.1	2
Cowdung cake	17.7	13	1.1	2
Kerosene	2.2	2	10.3	19
Liquified petroleum gas (LPG)	7.8	6	25.8	48
Other	3.7	3	3.2	6
Amenities owned
Television	26.1	19	34.5	64
Bicycle	59.2	43	24.7	46
Transistor radio	43.5	32	23.9	45
Scooter, motorbike	9.2	7	13.3	25
Telephone (fixed)	5.2	4	12.3	23
Car, jeep, or van	1.8	1	3.0	6
None of the above	56.0	41	10.2	19

 

Source: 2001 Census of India.

---

Car, Computer Ownership Rare

That ultimate Western measure of middle class status, the automobile, is a relative rarity in India. Less than 5 percent of households had some type of vehicle. In the rural areas, vehicles tend to be rather old and in disrepair. In Delhi, vehicles more than 15 years old are not allowed, but these vehicles often begin a second life in rural households outside the city. The much-anticipated introduction of the US$2,000 Nano by Tata Motors will undoubtedly boost the number of cars on the road, primarily in larger cities. The Nano is quite small. with a motorcycle-type engine, and the first model will not be air-conditioned. Its price, however, is only a little more than the most expensive motorbikes and it does get one out of the rain. It can be anticipated that some will be purchased by nonresident Indians (NRIs) working in Western countries as wedding and family gifts. Still, the sight of a family of four aboard a scooter or motorbike is likely to remain more common than a family riding in a private car for a very long time to come. The number of two-wheel vehicles increased by 52 percent between 2000 and 2004, from 34 million to 52 million while, over the same period, the number of cars, jeeps, and taxis rose 54 percent, from 6.1 million to 9.5 million.

NSS data for 2002 show that 1.5 percent of urban households in nonslum areas had a personal computer with an Internet hookup and an additional 1.9 percent had a computer with no Internet (see Table 3).

---

Table 3
Percent of Households in India With Certain Amenities, 2002

Amenity/consumer item	Rural	Urban nonslum
Electric fan	35.3	82.3
Refrigerator	3.8	30.0
Sewing machine	10.0	26.6
Telephone (fixed)	5.3	26.4
Air cooler	25.5	16.6
Washing machine	0.6	11.8
Water heater	0.7	8.0
Room heater	2.7	4.8
Cellphone	0.9	3.9
Air conditioner	0.1	2.1
Computer, no Internet	0.6	1.9
Computer, with Internet	0.0	1.5

 

Source: India, National Sample Surveys, 2002.

---

These figures are probably at odds with the image of urban Indians one often gets from the Western media. Computer ownership was virtually nil in rural areas. Ownership of a telephone in urban nonslum areas was 26.4 percent for fixed phones and 3.6 percent for cell phones.  

Electricity Not Always Reliable

The NSS also provides times series data on the source of household energy and lighting. By 2001-2002, the use of electricity surpassed that of kerosene in rural households and stood at 56 percent electricity, 42 percent kerosene in 2006-2007. In urban areas, the availability of electricity rose to 93 percent in 2006-2007. These survey statistics, however, conceal the fact that power cuts are a frequent fact of life in India so that many households are without power for many hours of the day.

Even a cursory examination of the types of data cited in this article shows that many stories written about the contemporary lifestyles of Indians are fraught with exaggeration. There is, without question, a middle class that has been growing slowly over the past few decades. Yet even that group has but a passing similarity to the concept of the middle class in the West.

---

O.P. Sharma is a PRB consultant in India. Carl Haub is senior demographer at PRB.

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References

1. As in many countries, the official definition of urban areas includes relatively small localities. In India, a village or town with 5,000 or more population and with 75 percent or more of the male labor force not directly engaged in agriculture is considered urban. In India, 28 percent of the population is considered urban and 72 percent rural.
2. U.S. Census Bureau, "Average Number of People per Household, by Race and Hispanic Origin, Marital Status, Age, and Education of Householder: March 2001," accessed online at www.census.gov/population/socdemo/hh-fam/cps2001/tabavg1.xls, on Dec. 13, 2008.

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Copyright 2008, Population Reference Bureau. All rights reserved.

Microsoft to empower 50,000 Nigerians with IT, outsourcing skills

Monday, 15 December 2008 00:21 EMEKA EZEKIEL

Global information and communication giant, Microsoft, has set an
ambitious target of training 50,000 Nigerian youths on IT and
outsourcing skills. Ken Spann, Developer Platform Evangelist Lead for
Microsoft Anglophone West Africa, told Business Day in an interview in
Lagos that the initiative is aimed at facilitating the development of
a vibrant outsourcing sector that would ultimately make Nigeria the IT
Enabled Outsourcing hub in West Africa .
Spann explained that Microsoft would partner with the government,
individual and corporate organisations in order to develop the
country's potentials in outsourcing business.
Said he "Our objective within the next five years is to train 50,000
Nigerian youths, especially students, in various areas of information
and communication technology using Microsoft curriculum. We want to
train developers and people that know how to establish communication
solutions based on Microsoft applications. We are ready to provide the
help, training and other resources that are required towards
empowering Nigerian youths with the necessary information and
communications technology skills.
" Nigeria has the potentials to become the premier outsourcing country
in the world. The World Bank has just commissioned a study that says
Nigeria can be the premier outsourcing country in the world. Microsoft
will be exploring and looking at this opportunity. We shall be
partnering with individuals and corporate organisations towards
exploring this opportunity .We have plans to raise the intellectual
capital and capacity of Nigerians because the future is very bright
for the Nigerian economy."
According to Spann, "If you look at Indian, for instance, everybody
there is talking about outsourcing. In India , English is not their
language yet they learn English on top of everything else. On the
other hand, English is the official language in Nigeria . Therefore,
that impediment is already out of the way which makes Nigeria a more
favourable outsourcing destination because English is the language for
business in the world. With this, it is easy for Microsoft to build IT
capacity in Nigeria . The reality is that outsourcing training is part
of the Microsoft curriculum which is coming up in the future. We
intend to work with the government, corporate organisation
universities in strengthening outsourcing initiatives in Nigeria .
Globally, Small and Medium Scale Enterprises (SMEs) and Large Scale
Enterprises (LSEs) are constantly searching for economies where cheap
and readily available outsourcing skills could be deployed to improve
their overall profitability.
Outsourcing of non-core operations or jobs from internal production to
an external entity, such as a sub-contractor, is gradually changing
the landscape of businesses globally. Even in developed economies,
companies are taking advantage of cheap and readily available
outsourcing expertise in other markets to strengthen their competitive
advantage. India and China are among the emerging economies that have
made outsourcing a key driver of economic growth and development.
According to the National Outsourcing Policy and Institutional
Framework, Nigeria's outsourcing sector is estimated to provide 10,000
jobs in both Information Technology(IT) and non-IT related fields in
the first three years of implementation and over 45,000 new jobs in
the next four years.
The policy was formulated in January, 2007. In addition, the federal
government's revenue from licensing and taxation of profits from
outsourcing companies is projected to grow from N55 million in the
fifth year to over N1.3 billion by the tenth year.

Author of this article: EMEKA EZEKIEL

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BM signs outsourcing deal with Rajasthan's co-operative bank

BS Reporter / Mumbai December 15, 2008, 14:10 IST

IBM, the US based infomration technology (IT) company, on Monday said that it had signed a five year outsourcing agreement for managing the IT infrastructure of Rajasthan based Madhav Nagrik Shakari Bank, for an undisclosed amount.

Madhav Nagrik Sahakari Bank has plans to expand from existing network of 25 branches in Rajasthan. It also plans to offer services such as internet banking, mobile banking and ATM facilities to its semi-urban and rural area customers.

"In this age of technology-driven banking, even co-operative bank like ours are taking a leap in providing the best of banking experience to our customers," said Mukesh Modi, managing director, Madhav Nagrik Sahakari Bank.

With IBM hosting the bank's entire IT infrastructure from its own data centers, the bank will be able to leverage the same world-class expertise that serves many of its larger enterprise as well as global clients.

Nipun Mehrotra, vice president and general manager, Global Technology Services, IBM India/South Asia said, "We will continue to expand our geographical reach and work with more clients like Madhav Bank."
 
The bank has completed 35 years of operation and has over 172,000 customers.

Indian software giants eye Chinese market

By Yu Hongyan (chinadaily.com.cn)
Updated: 2008-12-05 16:24

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Indian software outsourcing companies are going on an acquisition spree in China, taking advantage of the country's huge domestic market and the thriving software industry to beef up its presence.

Indian software outsourcing firms have recently acquired "a considerable number" of small and medium-sized Chinese counterparts, swallowing up more than 40 local firms in Shanghai alone, reported China Business News, citing an unidentified industry insider.

But the Shanghai-based newspaper did not provide the financial terms involved in the deals.

Tata Consultancy Services (TCS), India's largest IT and business process outsourcing provider, launched another global off-shoring center in North China's port city of Tianjin last month, its fourth such facility in China.

Emerging markets like China make up 20 percent of Tata's orders, while those from the US have fallen below 50 percent due to the financial crisis, Girija Pande, head of TCS Asia Pacific, told China Business News.

Pande predicts an annual growth of 45-50 percent in the Asia Pacific region.

Wipro, another major Indian outsourcing player, expects a 10 percent turnover from Asia Pacific, said Rajiv Shah, vice president of the company.

China's supportive policies on the outsourcing industry, its geographic advantage, talent pool and infrastructure appeal to Indian firms. And the financial crisis has also driven some Indian companies to emerging markets like China to spread risks, according to Pande.

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Brazil's Vale to reduce nickel output in Canada

By ALAN CLENDENNING – 7 hours ago

SAO PAULO, Brazil (AP) — Citing falling nickel prices, Brazilian mining giant Vale said Thursday it will reduce production of the metal at its Canadian division and cut jobs in that unit through a voluntary retirement program.

Companhia Vale do Rio, the world's largest iron ore producer, plans to close indefinitely a mine in Canada's Ontario province, shut down operations for July in the province of Newfoundland and Labrador and delay for a year the sinking of a new shaft at the latter site.

Although there will be no layoffs associated with those actions, Vale's Canadian subsidiary, Vale Inco, launched a voluntary retirement program for staff employees who have at least 29 years of service.

There is no specific target number the company has set to achieve for voluntary retirees, Vale Inco spokesman Cory McPhee said.

The announcement comes on the heels of Companhia Vale do Rio's decision in October to implement similar production cutbacks at its Indonesian nickel operation and is the latest development among mining companies affected by the slowing global economy.

On Wednesday, Freeport-McMoRan Copper & Gold Inc. announced similar moves for its copper mines in Arizona and New Mexico. Since the first part of November, the Phoenix-based mining giant has issued layoff notices to about 1,400.

Metals such as copper and nickel are used in a variety of products so when the economy slows, demand and prices fall. Nickel most commonly is mixed with other metals to form an alloy such as stainless steel.

The global mining industry also has logged layoffs such as half the 80-member work force at the Kensington Mine near Juneau, Alaska, and 21 percent of the work force at Montana's Stillwater Mining Co., the only U.S. producer of palladium and platinum.

In a statement, Rio de Janeiro-based Vale said it will close indefinitely the Copper Cliff South Mine, one of six mines the company owns in Greater Sudbury, Ontario.

Vale Inco spokesman Cory McPhee said all of the 365 miners affected by the closure will be given other jobs within the company.

When the Vales Voisey's Bay operations close in July, Vale Inco will ask its 500 employees to schedule vacation during that month.

Workers assigned to the mine shaft development project will be reassigned, McPhee said. The company will review its contractors on an individual basis.

Vale also plans to pursue other initiatives to reduce costs on a global basis.

On Wednesday, Vale said it has cut 1,300 jobs from its work force of 62,000 since the global meltdown began. The cuts amounted to a 2.1 percent reduction at the world's largest iron ore producer.

The company said an additional 5,500 workers are being idled with pay to slow iron ore production, and 1,200 are being retrained for new assignments.

Vale Inco was created in 2006 after Vale bought Inco Ltd.

Vale's shares fell 25 cents, or 2.5 percent, to $9.89 in midday trading.

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