American Firms Pitch ‘In-sourcing,’ ‘Onshoring’

For small and medium software development firms, selling enterprises on outsourcing wasn’t always easy. Many CIOs were skeptical of savings estimates and reluctant to take action that might give management an excuse to slash the IT department budget and staff.

But contract code writers delivered on their promises, giving large corporations and government agencies confidence to parcel out increasingly complex projects.

Now, as overseas software development hubs emerge, U.S. firms are modifying their pitch, highlighting quality and security over cost savings, while at the same time trying to leverage to their advantage the political firestorm swirling around the trend.

The pros of ‘In-sourcing,’ ‘On-shoring’

CrownPeak Technology, a hosted content management company, recently introduced a set of software service offerings to give companies “a U.S.-based alternative to offshore outsourcing.”

CEO Jim Howard raises issues that potential customers may not have plugged into their offshoring calculus, such as higher communications costs, the possibility of language and cultural misunderstanding and possible exposure to security breeches.

“Companies like CrownPeak are mature and stable,” Howard said. “This is a lower risk alternative.”

CrownPeak counts a number of large companies as customers, including business publisher Crain Communications, diversified technology manufacturer Honeywell and bicycle maker Trek.

Ironically, the Marina Del Rey, Calif., company’s service is also used by the federal government’s U.S. Trade Representative office which is responsible for policies that are often blamed for facilitating the flow of work to lower cost countries.

Another firm fighting the offshoring tide is Visible Systems, a Lexington, Mass., consultant and modeling software specialist that sells to large corporate and government customers.

“I don’t think that all the benefits of in-sourcing are completely understood or are being articulated by the industry,” Mike Cesino, Visible’s president and CEO.

Chief among them is quality and consistency. Privately held Visible has more than 20 years of experience and views its staying power as an advantage.

It has built a data warehouse tool for retailer Best Buy and a software development platform for the National Aeronautics and Space Agency (NASA). And for OPT, which provides enterprise applications for metal manufacturers, Visible crafted a solution to quickly covert applications to a new platform.

With its experience, customers can be confident that projects will get done on time and done right, Cesino said. By engineering quality up front, companies save time and money.

By definition, IT outsourcing is a surrendering of control. However, Visible argues that enterprises have greater supervision when a U.S.-based firm does the work.

Kip Martin, a vice president of research at META Group, is less convinced. There’s no evidence to prove that Indian programmers are less skilled than their American counterparts, he said. The offshore versus on-shore debate is largely based on emotions and politics.

“Our advice to clients is that if it’s off your premises . . . you need to look at all the variables that go into it,” Martin said.

That includes local languages, jurisdictions, intellectual property laws, communications infrastructure and geo-poltical concerns, among others.

Opportunities for U.S. Outsourcers

The offshoring backlash is beginning to impact IT decision makers, in part because of public relations concerns, Martin said. Some members of Congress are urging legislation to penalize American companies for sending IT work overseas. Similar efforts are underway in statehouses in tech-heavy states.

“The hype is causing havoc,” Marin observed, “When I’m in discussions with [clients], they say ‘We want to do business with American companies,’ ” Martin said. “But my query to them is, ‘Define what an American company is?'”

Many firms have U.S. headquarters but remote offices in India and other countries, Martin said. Others may have a large presence in this country, but are based in Bermuda to avoid U.S. corporate taxes. In an age of globalization the distinctions are almost impossible to make.

While possibly winning some business because of a heightened sense of patriotism (or protectionism depending on your political bent), U.S. software firms can certainly close deals on their own merits.

Having seen enterprise customers cut costs 20 percent to 40 percent, mid-market companies are exploring IT outsourcing. Some mid-sized companies may be inclined to go with smaller U.S.-based development houses, rather than larger offshore IT services firms.

If a customer represents 10 percent of a small IT outsourcer’s revenues, he may get better customer service than from a larger firm, Martin said. He might be able to pick up the phone and get the CEO or head of sales. “That’s part of the value proposition,” he added.

There are also opportunities for U.S. outsourcers to work with the government. Federal agencies have embraced IT outsourcing for a range of projects, especially those that increase interoperability or security of disparte systems and software. What’s more, security regulations sometimes prohibit them from sending these jobs overseas.

A study by Input says federal government spending on computer systems will increase at a compound annual growth rate of 8 percent from $13.8 billion in fiscal year 2003 to more than $20 billion in FY 2008. State government are following suit as well.

“There are definitely opportunities for all kinds of players,” Martin said. “If [a U.S. contractor] has a particular set of applications or a geographic, technological or business practice expertise, they have a role to play.”

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