Some tech companies rethink their outsourcing strategies

By John Boudreau

Mercury News

http://www.mercurynews.com/fdcp?1236188095545

Posted: 03/03/2009 06:21:07 PM PST

The global economic crisis, as well as pressure from the Obama administration to keep jobs at home, may be causing some tech executives to rethink their outsourcing strategies.

A new survey of chief financial officers suggests these perilous times are causing some to consider outsourcing operations to other regions of the United States rather than overseas. While there is no evidence of a major shift in outsourcing — and while some experts think the bad economy will actually accelerate the movement of U.S. jobs to developing countries — the recession clearly has caused corporations to reassess their global strategies.

Twenty­two percent of the respondents said they were more likely to consider the United States for new outsourcing work than foreign countries, according to the BDO Seidman 2009 Technology Outlook Survey taken in January and released on Tuesday. The report tallied responses from 100 chief financial officers at hardware, software, telecommunications and Internet companies nationwide.

About a third of those polled said difficult international economic and political climates have lessened their appetite for overseas outsourcing. A fourth of those polled are concerned about international business and tax regulations, and 14 percent worry about intellectual property risk.

“My gut tells me this is just a reaction to the current economic environment,” said Douglas Sirotta, a San Jose­based partner in the technology practice of BDO Seidman, a national consulting company.

Executives, though, are also concerned about the Obama administration’s stance on outsourcing. During his address to Congress last week, President Barack Obama said, “We will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas.”

Concern overseas

Such statements unnerve companies across the globe, said Rafiq Dossani, a research scholar at StanfordUniversity’s Asia­Pacific Research Center.

“Indian companies are very worried about this,” he said. “They’ve been trying to figure out whether it will effect their business. If Obama’s statement becomes a law, there will be some impact. Some companies here will say, ‘We can’t take chances.’ There’s so much uncertainty.”

The survey did not specifically ask executives whether events such as the recent Mumbai terror attacks or fears about the Obama administration’s more restrictive views on outsourcing discouraged them from shipping work overseas. But Sirotta believes the current economic turmoil has added to the usual headaches associated with looking for low­cost help in countries like India and China.

India, he said, “tends to put a lot of restrictions on doing business in that country. China is getting much more sophisticated with its regulations and tax requirements.”

While numerous companies abroad that offer outsourcing services to American companies are seeing a rapid drop in business, experts attribute much of the decline in orders to the contracting U.S. economy.

“Many “… (American companies) are packing their bags and heading for home,” said Steve Cook, a former Silicon Valley executive who is now chairman of Enclave, a software development company in Da Nang, Vietnam. “Those who are remaining are looking for savings, demanding rate relief.”

Still, he thinks outsourcing within the United States will be nothing more than a “niche” industry.

“It will appeal to some,” Cook said. “There will be some U.S. clients who will find cost savings and who will feel comfortable with staying domestic. Outsourcing is a vice in many a mind.”

‘Wishful thinking’

But Vivek Wadhwa, a researcher who studies the role of immigrants in America’s economy at Duke and Harvard universities, said any expectations about a decline in overseas outsourcing are “wishful thinking.”

“Companies are desperate to reduce costs,” he said. “They are going to India and China in droves.”

Vamsee Tirukkala, co­founder of Zinnov, a Silicon Valley outsourcing firm, said no more than 2 percent of his clients have asked about expanding operations to other regions in the United States.

“This economy has pushed more and more conversations in the boardrooms about how to optimize costs,” Tirukkala said. “Any companies that are closing down offshore operations are companies that are actually closing down their business.”

Sirotta said it would be difficult for regions of the United States to compete for a lot of outsourcing work because other countries offer powerful incentives to multinationals and have large numbers of skilled and low­cost workers.

“Some of these countries, like India, have done a very good job of creating a really good skilled labor force,” he said. “They are very motivated.”

Contact John Boudreau at jboudreau@mercurynews.com or (408) 278­3496.

Technology outsourcing SURVEY

A random survey of 100 chief financial officers for U.S. tech companies sampled attitudes about outsourcing.

When asked the most likely location for future outsourcing, 22 percent picked the United States. Next on the list were China, 16 percent; India, 13 percent; Southeast Asia, 7 percent; Latin America, 7 percent; Western Europe, 6 percent; Canada, 5 percent; and Eastern Europe, 3 percent. When asked where they currently outsource jobs to, 50 percent of those surveyed said India. Next came Southeast Asia, 31 percent; China, 19 percent; and Western Europe, 19 percent. Source: BDO Seidman 2009 Technology Outlook Survey