Outsourcing at Home

With Indian wages rising and the rupee strengthening against the dollar, some IT services companies are opening facilities in the U.S.

It's hardly news when India's Tata Consultancy Services (TCS) opens a new outsourcing facility, unless it happens to be in Ohio.

TCS, one of the world's top hired guns for corporate IT and back-office services, opened its first U.S. software development center in a suburb of Cincinnati on Mar. 16. And it's hardly alone. Rivals including Accenture and India's Wipro are pursuing similar ventures in unexpected places around the U.S., from Oregon to Arizona to Georgia.

Make no mistake. There's still plenty of money to be saved by shipping work to far-away places with cheaper labor. Yet the economics of outsourcing are changing: With wages rising sharply in India and the dollar's value sliding against the Indian rupee, "there's been a 30% change in cost over the last year," says Andy Singleton, chief executive of Assembla, a company that organizes distributed software development teams. Three years ago, it didn't make sense for Assembla to hire anyone in the U.S. because labor costs were so low in India. But now, "as costs change, we end up with a lot more Americans," Singleton says.

Niche Opportunities for the U.S.

While India is still a great deal for many companies that want to cut costs on high-tech workers, some experts predict the labor savings there could evaporate in 5 to 10 years. That has spurred some interest in lower-cost labor markets in the U.S. "We've seen quite a few small, rural sourcing projects," says Doug Brown, partner of Brown-Wilson Group, an outsourcing consultancy.

If nothing else, these new IT facilities in unexpected places provide an intriguing alternative to Silicon Valley and other pricey high-tech hotbeds. A July, 2007, report from the Information Technology Association of America (ITAA) estimated that midsize metropolitan areas and rural communities could provide a 30% cost savings over top-tier IT hubs in the U.S. The report acknowledged that overseas outsourcing is here to stay, but stressed there might be a niche opportunities in low-cost domestic outsourcing.

Tata says it opened the new software center in Milford, about 16 miles northeast of Cincinnati, because it is trying to be more global and it also wanted to show its commitment to the U.S. The facility is expected to employ up to 1,000 people. "People have criticized the Indian outsourcing industry as exporting people and not investing in the U.S.," says Gabriel Rozman, executive vice-president of emerging markets at TCS.

Cheaper Cost of Living

Rozman says TCS chose Milford in part because of its proximity to customers in the Midwest and on East Coast, as well as its strong talent pool. It also helps that the cost of living in the greater Cincinnati area is nearly 10% below the national average, according to the American Chamber of Commerce Researchers Assn. (ACCRA). And compared to Silicon Valley, the cost of living is 42% lower.

The notion that lower-cost U.S. markets might be ripe for outsourcing businesses began percolating a few years back. Accenture (ACN), which already had considerable outsourcing operations in major U.S. markets, announced a five-year deal in late 2006 to manage Cayuse Technologies, an outsourcing business started by the Umatilla tribes on a reservation in Northeast Oregon (BusinessWeek, 11/6/06).

Kathy Brittain White latched onto the idea even earlier, starting Rural Sourcing in Durham, N.C., and Jonesboro, Ark., back in 2004. "Why do we have to go offshore when there are many areas in the U.S. where there are good universities and 50% less cost of living?" asks Brittain White. The cost of living in Jonesboro is 45% lower than in Silicon Valley and 13% below the national average, according to the ACCRA.

Shortage of Talent

It wasn't until more recently, though, that foreign outsourcing firms began setting up shop in the U.S. Aside from TCS, India's Wipro announced in August, 2007, that it would open a global software development center in Atlanta with plans to hire 500 workers. Brown says his firm has done some site evaluations in the rural Southwest around Phoenix and Albuquerque for foreign companies interested in starting outsourcing operations in the U.S.

But one big obstacle to this trend is the limited availability of highly skilled IT professionals, according to the ITAA report. AT&T (T), for example, had trouble finding talent when it agreed to move 5,000 jobs back to the U.S. from India, forcing the company to set up a training program (BusinessWeek.com, 10/11/07).

At least one outsourcing firm in the Cincinnati area is concerned that Tata will boost competition for talent. "I will certainly now have competition that I'll run up against [in recruiting]," says John Bostick, chief executive of dbaDirect, a database outsourcing firm. DbaDirect is located in Florence, Ky., about 30 miles from the Tata's new center. Still, Bostick says he's happy to welcome TCS to the neighborhood. "Inevitably it will help the economy by bringing capital to the area."

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