By David E. Gumpert Are major U.S. corporations ready for a homegrown alternative to offshore outsourcing? Mark Jennings is betting his 18-year-old boutique info-tech placement firm that they are. He has committed his business, which boasts about $4 million in annual revenues, to offering the services of American programmers at rates competitive with those in India, the Philippines, and other Asian countries.
Jennings has been at it for seven months now, and he has discovered one thing: U.S. corporations aren't rushing to get a good deal by hiring American. He has pitched his concept to more than 100 corporations, many of which he has dealt with over the years of handling traditional outplacement. So far, all he has to show for it are a total of two American programmers working on a pilot basis at a pair of corporations.
EXPORTING KNOWLEDGE. Based on my conversations with three of his customers and prospects, I'd say he has a tough nut to crack. The reality appears to be that major American corporations are addicted to the financial savings they're gaining from outsourcing IT work overseas, and an appeal to a combination of economics and patriotism is an uphill battle. Not that Jennings is discouraged -- in fact, he's still pumped, saying as many as 20 of the corporations he has contacted are seriously considering his approach.
Jennings' proposal, which he refers to as "insourcing," is simple: His outfit, Synergroup Systems of Aliso Viejo, Calif., will make available to corporations highly experienced programmers for $38 an hour or less. This is around half the going price for contracted U.S. programmers, he says, and only slightly more than rates available in Asian countries. That said, Jennings figures the small premium is offset by savings in travel, oversight costs, and management expenses.
Jennings took on his mission partly because Synergroup Systems has been decimated by the down economy and the exodus of IT jobs from the U.S. His outfit's current revenues are down by a third on what they were in 2000.
SAFE AT HOME. That's one reason. A second is that Jennings is convinced a real opportunity exists to beat the Asian outsourcing firms at their own game. "Jobs are being created en masse," he says. "They're just being created overseas. We have phenomenal people [in the U.S.] being cast away."
The keys to his eventual success, he says, are twofold. First, there's the newfound willingness of American programmers to work for a lot less than once was the case. Since he put out the word late last summer, he has been inundated by responses from programmers -- many of whom were earning $90,000-plus salaries and generous benefits not so long ago. Today, they are willing to work for less than $30 an hour, which translates into $50,000-$60,000 annually, with no benefits.
Second, there is his own willingness to accept significantly lower margins in the expectation that volume will make up the difference. Before that volume picks up, however, he needs to convince U.S. companies that local programmers really do represent a viable alternative to looking east across the Pacific. Here the future grows hazy. The prospects and customers I spoke with have all had extensive experience outsourcing programming work overseas and, frankly, they like the results. (Though with offshore outsourcing at the center of controversy and political debate, they are reticent to brag on the record.) Here are the concerns I heard:
Costs: Even though he has sliced a significant amount off the going rate for his U.S. programmers, bringing them close to overseas rates, that is still not enough for some companies. One of Jennings' trial customers, an official of a multibillion-dollar distributor, says that the $38 she pays for Jennings' American programmer is $12 an hour more than an equivalent programmer in India. "The people who run this company have real tight purse strings," she says. As a result, her company likely won't expand its engagement with Jennings. (Tellingly, the woman demanded that neither she nor her employee be identified. "This is on the news every night," she said, "and I don't want my job outsourced.")
Expertise: In the view of some corporate types, the financial savings from going to India are enhanced because they include a total package. Thus, John Magrann, vice-president of product development for Ceridian (CEN), a $1 billion human-resources service outfit, sees the Jennings model as "more of a supplemental resource."
Indian firms will likely continue as the core outsourcing resource for his company because they "can offer total outsourcing" of all major functions -- management, programming, communication. Moreover, the firms Ceridian uses have high "Capability Maturity Model" ratings, an internationally recognized system for evaluating programming expertise. By contrast, Jennings' venture doesn't handle complete projects and doesn't offer such ratings.
Expectations: The reality in Corporate America today is that any service provider is going to use offshore outsourcing to one extent or other, says Michael Gibson, vice-president of services for Digital Evolution, a small provider of Web-services management and security to large companies, and one of Jennings' trial customers. "If you don't use it [offshore outsourcing], they feel you are not up to the game." When Gibson negotiates with corporate prospects and there are disagreements about price, "They inquire about whether you are thinking about going offshore." So while Gibson likes the services he has received from one of Jennings' technologists, he sees them as a better fit for small-company clients than with Corporate America. "If you're a big company," Gibson notes, "you can negotiate very attractive rates offshore."
One of the messages that comes through loud and clear in speaking with Jennings' prospects and customers is that a huge amount of momentum has built up in favor of foreign outsourcing. Think of it this way: Jennings is offering a business model that seems to answer corporations' complaints that the cost of American labor is too high, while also responding to the stump speeches of politicians, who say that the loss of American jobs is undermining long-term economic growth. Yet despite checking both those boxes, his undertaking remains a very tough sell.
EXPORTING KNOWLEDGE. I would have expected something different, especially based on a previous column I wrote describing an entrepreneur who has gone out of his way to steer clear of outsourcing and hire Americans (see BW Online, 12/2/03, "U.S. Programmers at Overseas Salaries")
That column triggered a deluge of e-mails and many media stories -- nearly all applauding the entrepreneur's approach. But the applause must be coming from American workers and entrepreneurs rather than from corporate executives. Within large corporations, the pressure to trim every last dollar from short-term production costs is so intense, corporations assess their employees and suppliers in terms of how deftly they outsource. No matter that companies may be sending valuable knowledge overseas. No matter that some individual executives feel uneasy about letting their country down.
Right now, it looks as if the best Jennings can hope for is that large corporations will come to view him as something of a backup in the event that outsourcing restrictions begin cropping up. For example, he stands to benefit if Congress passes legislation that would tax or otherwise penalize outsourcing, and if states enact privacy-related regulations requiring that sensitive information, like medical records, not be sent offshore.
In the meantime, Jennings urges corporate executives to show a semblance of patriotism. "Don't turn your back on these people" who have lost jobs to outsourcing, he pleads. "Give them a shot." David E. Gumpert is the author of BurnYour Business Plan: What Investors Really Want from Entrepreneurs and How to Really Start Your Own Business. Readers can e-mail him at email@example.com