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in doing so are just as pronounced. Offshoring from the wealthy industrialized nations
of Western Europe is estimated at 2.5 billion USD, representing only about 25% of US
offshoring volume. In 2003, the US was responsible for almost 70% of the export of
Indian IT services, and Europe for only 22%.24
There are several reasons for the US“European differences. The European ¬rms
have a more conservative style of doing business than the Americans, taking fewer
risks in sourcing and are more particular about spending on speci¬c projects. There is
21 The offshore landscape

a more inward style of functioning in Europe and organizations prefer to deal with ven-
dors whom they know well. Trust is more important, and therefore building personal
relationships takes a longer time. In addition, Europe has stricter labor laws with greater
restrictions on redundancies (layoffs). Bringing staff from offshore ¬rms to Europe is
dif¬cult due to visa restrictions. Finally, it is clear that language plays a role. There are few
Indians who can read French or Danish manuals, fewer still who can build organiza-
tional applications with French or Danish interfaces.
Britain is the exception and is the European leader in offshoring. British ¬rms are
the preferred partners for English-speaking offshore countries, and especially for its
former colonies (e.g. India, Pakistan, Bangladesh, and Sri Lanka). Ninety-¬ve percent
of all UK offshore work is from India, estimated at 1.2 billion USD in 2003. Although
the UK IT services market share in Western Europe is 21%,25 it is responsible for 59%
of the Indian software exports to Europe. Indian software giant Tata Consultancy
Services (TCS) set up operations in the UK way back in 1975, a time when the word
offshoring had yet to be coined. It™s ¬rst client was CMIG, an insurance company. By
2004, TCS had 3700 professionals working for British clients, of which 1600 were
working onsite.
Indian IT is quite visible in Britain with hundreds of of¬ces of Indian providers who
are increasingly partnering with local and foreign players. Wipro works together with
Accenture, at the Thames Water project; and TCS with Fujitsu, at the National Health
Service. The majority of the offshore work is being performed by end-user organizations,
such as in the ¬nancial services industry, telecom, and retail. By the early 2000s, large
British organizations such as ICI, Lloyd™s, British Telecom, London Underground, British
Airways, P&O Nedlloyd, UBS Warburg, Marks & Spencer, Tesco, and Safeway were
offshoring. Similar to the picture in the US, offshoring still represents only a small
sliver of the huge market in IT services: 2.4% in 2002, forecast to double by 2006.26
And then we come to Germany. Roughly 80% of Germany™s largest companies have
not yet offshored.27 German ¬rms have been reluctant to offshore for several reasons. The
first reason may well be language and culture: in order to successfully work with clients,
good German language skills are essential since many German employees are unable
to discuss detailed business issues in English. Second aspect is the historical background:
unlike former colonial powers, namely Britain and The Netherlands, Germany has fewer
ties with distant cultures. As a result, decision-makers are hesitant about foreign services
sourcing. Third, Germany™s mittelstand, its medium-sized ¬rms that are the foundation
of the economy, has been slow to offshore because of their more conservative, go-slow
Important German software companies, such as SAP and Software AG, are actively
offshoring. SAP is the most successful European software product company. Its devel-
opment center in India is the largest development hub for SAP outside Germany. The
¬rm employed 1000 staff in Bangalore, in 2004, with plans to triple that number within
2 years.28 SAP also has a smaller development center in Shanghai. By 2004, Siemens, the
electronics and engineering giant, aimed to shift around 10,000 jobs from Germany to
22 The fundamentals

Figure 1.8 (a) The
Shanghai Multimedia
Park, opened in China in
2002, houses more than
one hundred multimedia
and software companies.
It is located in the
western part of
Shanghai, and is
surrounded by
institutions of higher

Figure 1.8 (b) Part of the
main campus of Infosys,
one of the largest IT
services ¬rms in
India. The high-tech
campus in Bangalore
includes development
and training centers,
meeting rooms, and

lower-cost countries in Eastern Europe and Asia. The banking and ¬nance sector is a key
vertical in the German offshore market; Deutsche Bank and Dresdner Bank are large
consumers of offshoring services. Other offshore clients are car producer BMW and
the national airline Lufthansa. It is also worth noting that, while the UK™s primary off-
shoring destination has been India, Germany looks to Eastern Europe. German ¬rms
offshore about 60% of their work to Eastern Europe, with only 40% to India.29 A 2004
poll found that the German experiences with these “nearshore” countries were some-
what better than with India.30
23 The offshore landscape

Figure 1.8 (c)
Headquarters of Politec
in Brazil™s capital
Brasilia. Politec is one of
the largest IT services
¬rms in Brazil.

Figure 1.8 (d) BaliCamp
is an offshore develop-
ment center on the
tropical island of Bali. It
is designed in traditional
architectural style on a
mountainside. BaliCamp
was built in 1998 by
Sigma, a major
Indonesian IT services

Smaller European countries, by virtue of necessity, have a more international outlook,
are multi-lingual, and are more capable of communicating in English. An example is
Switzerland, where offshoring corporations include Swissair, Nestl©, and banking multi-
nationals Cr©dit Suisse and Union Bank of Switzerland. In Scandinavia, offshoring cor-
porations include Swedish telecommunications equipment maker Ericsson and mobile
phone producer Nokia from Finland.
The Dutch have been offshoring for more than 20 years. Jan Baan, the technology
entrepreneur, illustrates the long Dutch history of offshoring. While still a small software
firm in the late 1980s, Baan established an Indian development center. As he built
his software company in the 1990s into a global giant he expanded the company™s
Indian centers signi¬cantly, reaching a peak of 1000 employees in India, by 2000.
Once Baan, the company, collapsed, Jan Baan started Dutch software ¬rm Cordys in
2001, which quickly set up offshore operations with a 300-staff development center in
Hyderabad, India.
Over the years, at least 250 Dutch companies have offshored, including Philips, Shell,
ABN Amro Bank, and KLM. As with other nations, it is the large Dutch multinationals
24 The fundamentals

that moved into offshoring the fastest. But some small ¬rms have looked offshore as well.
For example, Decos is a small Dutch software company with 20 employees, producing
applications for document management. In 2000, it started a subsidiary in Pune, India,
with 12 staff, and now sells offshore services.
The Dutch have also been egalitarian in choosing their suppliers: we counted at least
35 nations that have conducted software work for Dutch organizations, including its for-
mer colony of Surinam, and some unlikely spots such as North Korea and Iran. India is
the preferred source, and the volume of Indian software exports to Holland is around 100
million USD. In 2004, we estimate that 5000 offshore staff were working for various
Dutch projects. This is a modest amount, since a total of 250,000 people are employed in
Dutch IT functions. A 2004 study estimated that this number could grow tenfold in 10
years to 50,000,31 which would represent a signi¬cant volume for such a small country.

Other countries
The offshore opportunities have rippled to other nations outside the traditional
industrialized economies. Two cases in the Middle East are noteworthy. Israel is both
a destination for innovative offshore R&D and a nation that sources some software
tasks to India. The largest Israeli software ¬rm, Amdocs, in 2003 announced the open-
ing of an offshore development center in India. Other large Israeli ¬rms soon followed
suit. The wealthy Gulf nations have long relied on foreign (mostly American) contrac-
tors to build and maintain much of their national IT base. With globalization, many of
these activities have been picked up by regional ¬rms in India and in Pakistan.

The offshore supply

Close to 100 nations are now exporting software services and software products. The
buyers are now presented with an “offshore menu” to satisfy any taste. The new offshore
destinations span the economic categories: from newly industrialized economies,
through transition economies, to developing economies and even some least-developed
nations. Much of the volume of the recent wave of software offshoring is going to three
large nations, the “Big Three” nations: China, India, and Russia. The common denomi-
nator of these three nations is that they have very large populations (which is why we
label them as “Big”), and each of these nations is endowed with a large, well-educated
work force in science and technology. The “Big Three” offshore nations™ software
exports are displayed in Figure 1.9, along with the exports from Israel, an important off-
shore software destination, but certainly not large in its labor pool.
In the “Big Three” offshore nations, India, China, and Russia, there were over 1000
organizations exporting software products or services in 2004. Add to this number
hundreds of ¬rms in destinations from Brazil, through Romania, and east to the Philippines.
25 The offshore landscape




Billion USD






94 95 96 97 98 99 00 01 02 03
04 05
19 19 19 19 19 19 20 20 20 20
20 20

China India Israel Russia

Figure 1.9 Export of software products and services from major offshore destinations.

These numbers do not include the micro-¬rms of three or ¬ve programmers, which are too
numerous to tabulate. By comparison, The Netherlands has a few hundred software ¬rms
and the US has 2200 software product ¬rms32 and roughly 4000 IT services ¬rms.33
As we noted at the beginning of this chapter, the offshore software labor pool has
grown markedly. In the “Big Three” offshore nations, India, China, and Russia, the 2004
workforce may be as high as half-a-million inside those organizations that are exporting
software and IT services. This number does not include those engaged in projects at home,
which is signi¬cant in China. The labor pipeline is also large in these three nations,
producing tens of thousands of engineers and computer scientists every year. Add to the
“Big Three” tens of thousands of software professionals in other offshore nations, and the
result is a very large offshore labor pool, seemingly endless. In the US, for comparison,
the number of software employees in 2004 was 675,000 according to the US govern-
ment™s of¬cial statistics34 (though quite a bit larger according to broader de¬nitions).
The result of the expanding global supply is ¬erce competition driving down prices.
This is good for the buyers in the industrialized nations. Two indicators illustrate price
competition: one for larger offshore deals and the other for very small deals. First, at
the upper end is the deal structure, where only a few years ago, according to IDC,35
85% of contracts were billed on an hourly basis, with resulting higher costs for the
buyers. By 2004, spurred by competition, this ratio fell dramatically, with only 20% of
contracts billed on an hourly basis, and with many of the remainder priced using some
performance incentive.
26 The fundamentals

Then we come to the low end of the software marketplace. For very small projects
online programming marketplaces match IT buyers and sellers in reverse auctions.
A business that puts up a small project for bids often receives 5“15 bids from around
the world. The ¬erce price competition resulting from offshoring is palpable: American
programmers are competing with programmers from India and other offshore nations,
in bidding on small programming jobs for as little as 10 or 25 USD per project.

The rise of Indian providers and the competitive response
One of the reasons that offshoring expanded so rapidly was the ability of the Indian IT
industry to grow large ¬rms quickly. These are the IT services ¬rms, commonly called
providers, which are the suppliers of contracted services in outsourcing (or out-tasking)
engagements. Since 2000 the top Indian providers, now labeled “Tier-1” ¬rms, and
numbering 5“7, have transformed themselves from Indian ¬rms into globally competing,
full service companies. In other words, these Indian-based providers have become
technology multinationals that are less India-centric.
The growth and geographic expansion of the top Indian providers has been remarkable.
TCS, the largest of the Indian-based providers, exceeded 1 billion USD in revenues by
2003, and had quickly expanded its delivery centers around the world as illustrated in
Figure 1.10 (delivery center is the label for development center). Since 2000 TCS and

Columbus, IN, USA
Phoenix, New Jersey, NJ, USA Yokohama,
AZ, USA Japan

India: 17 centers

Melbourne, Australia

Figure 1.10 TCS, the largest Indian provider; locations of its global “Delivery Centers” (2003).
27 The offshore landscape

other Indian Tier-1 providers began moving into Eastern Europe and China to head off
competition and establish bridgeheads to a range of customers. Some of this expansion
was achieved by hiring more staff in the US and Europe, while other expansion was
conducted through acquisitions, such as the Indian provider Wipro taking over the
energy services division of US-based AMS in 2003.
Observing all this with great concern are the non-Indian providers, particularly
the largest of these ¬rms (in North America: IBM, EDS, CSC, and HP; in Europe:
Capgemini, Xansa, LogicaCMG, and Atos Origin; and in Japan: Fujitsu). Indian Tier-1
providers are threatening to these global giants just as small, nimble, and low-cost
airlines are threatening the traditional, stodgy airlines in North America and Europe. The
Indian providers began winning deals and growing at a breakneck speed of 20“40% per
year, while the growth rate for the non-Indian providers was a moderate 2“7% per year.
The competitive response of American and European giants has been to compete
head on with the Indian providers by rapidly growing their own offshore centers and
becoming, in effect, offshore providers. Anglo-Dutch ¬rm LogicaCMG started a
Bangalore (India) center in 1998 growing it to 1200 staff by 2004; declaring that it will
double in size within a year after that. The ¬rm also has two smaller offshore centers
in two other low-wage countries (Czech Republic and Malaysia). Atos Origin, a French-
based provider, built an offshore network including centers in India (its largest offshore
center), Poland, Hungary, China, Malaysia, Brazil, and Argentina. The American giants
expanded even more. For example, EDS had 13 offshore centers in low-wage nations in
early 2003, growing to 18 by the end of the year. Giant IBM has 16 offshore centers.
Remarkably, these large Western providers look more and more like the top Indian
¬rms: they are presenting their clients with hefty offshore menus, in effect inviting
them to choose any offshore location, as if selecting a vacation destination at a travel
agency. The difference between the large providers, be they American, European, or
Indian, is blurring. In terms of sheer size, for example, the top three Indian providers,
all at 25,000“30,000 employees, have exceeded most of the European providers, though
still far from IBM™s 175,000 employees in its IT services division, or even the some-
what smaller Accenture at 95,000 employees. The blurring of Indian and non-Indian
providers is not limited to the global giants: medium-sized ¬rms have also become off-
shore providers. For example, the French company Valtech expanded aggressively into
India to the point where almost half of its 800 employees are offshore.

In some ways nearshoring is the opposite of offshoring to India. Many companies prefer
destinations that are close by, but still less expensive that at home. This is why, in offshore-
speak, Canada, with its lower-wages, has become a nearshore destination for US ¬rms.
The proximity in time zones, travel time, and culture makes Canada easier to deal with.
28 The fundamentals

Except for Britain, many European nations seek suppliers closer to home: the Finns
look, at least in part, to Estonia and the other Baltic states; much of the Germans™ off-
shoring is nearshore to Poland, the Czech Republic and Hungary, and other Eastern
European nations; the Italians sometimes nearshore to Yugoslavia.
Japanese companies nearshore to China, with some activity in Vietnam and Korea
(though due to relatively high costs in South Korea, it has fallen out of favor). The city
of Dalian in northeastern China, with its historic ties to Japan, has a relatively high con-
centration of Japanese offshoring. NEC has been among the most active in China. The
¬rm began to develop software in China in 1982 and outsources software work to
40 Chinese ¬rms which employ over 3000 programmers. Several other large Japanese
¬rms were reported to be spending 10“30 million USD annually in China.
Some consumer nations, such as the US and the UK, do not nearshore much of their
work. For example, the US is the principal software customer for India, Russia, and
Israel; all are countries far away. Similarly, the British generally prefer India. However,
some offshoring from the US does stay nearshore in the American continent: Canada
was mentioned earlier; the Mexican industry has been marketing itself as the ideal
nearshoring destination for US ¬rms; and other work is spread all over Latin America.

IT-enabled services

American lender E-loan gave customers two choices when they called in for
loan application processing. If they want the loan processed the same day, they
should press 1 for the Indian center; if they want their loan processed in the
US, which may take longer, they should press 2. The company reported that
86% of the customers pressed 1.36
Apart from software-related work, a very large number of other activities can be per-
formed offshore: customer interaction services, such as telemarketing, helpdesks, and call
centers. They also include various types of back of¬ce work, such as market research,
tax preparation, airline and hotel reservations, insurance claims processing, ¬nancial
research and Human Resource functions. They also include professional services
in the ¬eld of data and content integration, such as medical transcriptions, data entry,
digitizing, animation and multimedia. Finally, they include engineering services, such as
computer aided design (CAD) or architectural drawings.
All these services have one thing in common: they are substantially dependent on IT.
And since an IT infrastructure is an important tool and enabler to perform this work
offshore, the generic term IT-enabled services (ITES) is used to describe this diverse
range of activities. The abbreviation BPO (Business Process Outsourcing) is also used,
but this mainly refers to the back of¬ce activities. IT-enabled services offshoring is not
a new phenomenon: credit card processing in India for American customers has been
taking place for two decades, though it has accelerated only since the early 2000s.
29 The offshore landscape

An example of a large IT-enabled services user is HSBC, the UK-based ¬nancial
services company. In 2003, it had 1500 employees in China and 2000 in India to provide
clerical processing and call-center services. More than half of those employees in
China and India service UK accounts. The ¬rm also opened a new 500-seat processing
center in Kuala Lumpur, Malaysia.37 In 2004, it announced plans to transfer thousands
of jobs in the UK to India and Malaysia. It is also looking at Sri Lanka and the
Philippines to mitigate country risks.
Growth in IT-enabled services is spurred by falling telecommunications costs, partic-
ularly in contact centers (often referred to as call centers). Today, it costs almost nothing
to have a client use a toll-free number to call India or the Philippines. Contact centers,
where wages account for the majority of the costs, are now being moved offshore on a
massive scale. US-based Delta Air Lines launched a plan in 2003 to cut operating
expenses by 15% by the end of 2005 and moved parts of its call-center reservations oper-
ations to India. This move will save the company more than 12 million USD.38 British
Telecom opened a large call center in India in 1999. French speaking call centers are set
up in North Africa and Mauritius. A Dutch-speaking helpdesk operates in South Africa.
Many of the information processing services are labor-intensive and involve small
and repeatable tasks, such as processing a telephone call, or a single tax form, or a
drawing. These routine tasks can be peeled away, since they do not require proximity,
and then done offshore, cheaply. Since it is relatively easy to standardize and structure
this work, communication with the offshore site is less complicated and results in

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