Development Goes Offshore

Vendors looking into international opportunities.

The attacks of Sept. 11 and resulting concerns about terrorism have slowed—but likely will not stop—the growing wave of application development projects being outsourced to offshore companies.

Though momentum behind such projects continues to grow, more subtle effects will also change the way offshore work is contracted, and the uncertainties will likely affect the industrys advantages, observers say.

Large outsourcing vendors are eyeing the opportunities—or threats—and moving to shore up their presence in countries well known for creating a welcome environment for such work.

Accenture Ltd. late last month announced the establishment of its first development center, in Mumbai—formerly Bombay—focused on enterprise application development for Unix and platforms from Microsoft Corp. and SAP AG. Accenture also opened a European Delivery Center in Prague in the Czech Republic focused on business-process outsourcing for finance, accounting, customer relationship management and logistics for clients in manufacturing and chemical industries.

Other large outsourcers such as Computer Sciences Corp. are lining up to take part in the growth.

"Deloitte [Consulting] signed a very large deal with Mastech [an Indian company among the top 20 or 30 in revenue]. CSC said they will have a portfolio of partners. IBM Global Services hasnt made a formal announcement, but they wont be far behind," said Frances Karamouzis, an analyst at Gartner Inc., in New York.

Such large players are being drawn into offshore outsourcing—largely dominated by India-based companies such as Wipro Ltd. and smaller U.S.-based systems integrators such as Covansys Corp.—by growth rates projected by Gartner to be about 35 percent. The opportunity, Gartner said, will amount to between $30 billion and $40 billion in the next few years.

But the events of Sept. 11 and travel worries have slowed the advance of offshore work.

"There will indeed be a short-term dip in the signing of contracts or investigating these options because in the decision-making process for a fairly substantial project, many U.S. organizations that look at these options travel over to India," Karamouzis said.

Covansys, a Farmington Hills, Mich., integrator with a significant presence in India, has seen the opposite effect, according to Michael Bealmear, president and CEO. "Over the last month, customers we talk to suddenly see offshore as a pretty interesting idea."

Bealmear attributes the interest to a new emphasis on creating redundancy among application development teams.

"Until Lower Manhattan became a war zone, people had not thought about how to make human assets redundant. The human assets—the knowledge base necessary to support those apps—is really becoming a big deal," Bealmear said.

For India-based outsourcing companies, which together generate between $4 billion and $6 billion annually, the impact of Sept. 11 is full of subtle complexities, said Rob Linder, CEO at Boston-based Providio Technology Group, a U.S. outsourcer with international development centers.

The practice of sending Indian programmers to the United States to work on engagements will take a hit because it will be harder to obtain work visas, Linder said.

At the same time, U.S.-based companies fearful that legal protection is absent in politically unstable countries may choose to do business with a U.S.-based vendor that has greater control over access to the clients investment in application code, Linder said.

Such fears led Providio customer Clear Course Inc. to shun doing business directly with a foreign company. "If I had to go to court over any of the terms of the contract, it would be done in U.S. courts," said Winston Lee, executive vice president at the software startup, in Provo, Utah.

By keeping source code in the United States and using collaboration tools that allow international programmers to check out only chunks of code while they are being developed, Providio also provides greater control over a customers assets.

"Its not like sending a CD to Pakistan, say, Work on it for six months, then give us the results. The control, the source code and legal entity we are dealing with is all domestic," Lee said.

Although Indias effort to establish laws that protect clients interests makes it safe legally to send development work there, other countries once thought to be safe to do business in have taken a hit. Pakistan is no longer on the list for offshore outsourcing, Gartners Karamouzis said. The Philippines, which has a rich talent pool, is also politically unstable. That instability factored into the decision by Covansys to close its facility in Manila, along with a desire to expand in India, according to Bealmear.

Providios Linder said he believes that some India-based outsourcers will look to acquire smaller U.S.-based companies to offset the disadvantages that grew out of the terrorist attacks. By having a U.S. subsidiary where a customers code can be housed and then accessed using global collaboration tools, those companies could offset those disadvantages.

But they could find the acquisition hunt more difficult because their own market capitalizations took a hit following the attack, Linder said.

At the same time, U.S.-based vendors ranging from the Big Five consultancies to Web integrators, desperate to morph into more viable service companies, are themselves looking to make acquisitions in India.

Covansys, for example, is in ongoing talks with a pair of large professional service companies to buy an equity stake in Covansys Indian subsidiary. And Sapient Corp. has quietly grown its offshore capability in India. Sapient now has nearly 300 employees there, Gartners Karamouzis said. "They are trying to offer a more cost-effective cost structure to their clients and be a really good alternative to the Big Five with good quality and better pricing," she said.