Why Not Mumbai?

Government resistance to offshore outsourcing remains strong despite proven benefits in the private sector.

by / December 19, 2006
Congressional and public outcry in March 2006 at a potential transfer of six major U.S. port operations to Dubai Ports World illustrated the controversy of contracting foreign companies to provide public or infrastructure services. The Dubai deal, which was eventually voted down, was deemed too great a security risk despite the ongoing use of offshore outsourcing in the private sector, and in major infrastructure and ports around the United States.

Overall, outsourcing has produced the type of consternation that crops up each time economies shift to new ways of producing goods. Yet this shift has produced security considerations as well. The Department of Defense's (DoD's) private outsourcing of military and intelligence tasks to sustain operations in the second Iraq war also caused a flurry of concerns about patriotism and safety.

In particular, offshoring -- or paying a foreign-owned company to provide goods and services previously produced at home -- has triggered considerable opposition. Many opponents fear it drains jobs from American workers, particularly when tax dollars are part of the equation. Others believe that remote offshore providers don't offer the same quality in service as domestic companies do.

Since 9/11, the appetite for foreign presence in the public sector has weakened, especially in state legislatures and Congress, where numerous anti-offshoring laws were introduced in 2004 and 2005. Six states have passed laws limiting or abolishing state contracts with non-U.S. citizens, according to the National Conference of State Legislatures. Arizona and New Jersey prohibit all outsourcing in state contracts. Many other states tabled offshoring legislation with plans to further study the issue. Still others give preference to domestic contractors over offshore companies or require disclosure from contractors regarding where all work will be performed. Disclosure has become a concern since many domestic companies that outsource services do so to non-U.S. subcontractors.

The Buck Stops Here
The public sector's skepticism, even hostility, toward offshore outsourcing seems off-base, given its apparent success in the private sector. Corporate customers recognize that the offshore model has proven effective in providing better, faster and more cost-effective IT and software development services, said Robert P. Lee, CEO and chairman of Achievo Corp., a global software outsourcing provider with China. "Companies worldwide use software outsourcing to accelerate product cycles and improve their competitiveness."

Domestic public-sector outsourcing has become commonplace. The DoD is the single largest government outsourcer, and other government contractors saturate office space around the Beltway. State and local governments depend widely on outside contractors for enterprise architecture, call centers, human resource management, and Web site and e-business activities. Medicaid claims processing has also dramatically grown in outsourcing, as have the intelligence community and federal departments of Justice and Commerce. Cost, replacement of legacy systems and increasing numbers of public-sector retirees are all drivers for outsourcing.

Still, while public-sector outsourcing has been common for years, governments may have difficulty encouraging or requiring service providers to offshore any work they must perform for the government. "Politicians are expected by their constituents to preserve jobs and look out for their best interests," said Bob White, a partner with TPI, a global outsourcing advisory company. "For that reason, elected officials discourage the bureaucrats running the executive branch agencies from allowing solutions featuring an offshore component."

Security is a constant bedfellow of IT services, and also colors consideration of foreign outsourcing in state, local and federal government. Unemployment rates are another very public concern. As a result, perhaps, public-sector offshoring is especially rare, says a 2005 study from the Reason Public Policy Institute. Before 2006, offshore outsourcing remained a small portion -- about 6 percent -- of total federal government outsourcing, the institute reported, and less than .01 percent of government outsourcing in state and local governments.

"Most outsourcing is domestic because of anti-offshoring sentiment that started in the last election year," said James Meadows, attorney and partner at Hunton and Williams, an industry resource on global technology and sourcing. Security concerns and opposition to taking public dollars overseas are factors, he said.

Instead, many governments require service providers to perform a majority of the work within the government's jurisdiction. "At a minimum," White said, "preferential treatment during the evaluation stage of an outsourcing project is frequently accorded the service provider presenting a local solution." White concluded that these obstacles prevent offshore outsourcing from being adopted as a common solution in the public sector at this time.

Slow Adoption
A 2004 WashTech study found that only $75 million in state contracts was awarded to offshore companies -- small change when the total market revenue for the worldwide software and IT offshore outsourcing market reached $26 billion in 2005, according to data from market intelligence provider IDC. The study projected that the offshore outsourcing market will grow to $70 billion, by 2008.

However, in the human services sector, states are depending more on offshore companies. The Government Accountability Office (GAO) reported in March 2006 that offshoring occurred in one or more federally funded programs as a cost-saving measure in 43 of 50 states and the District of Columbia, most frequently in the food stamp and Temporary Assistance for Needy Families (TANF) programs, still occupying a small percentage of outsourcing expenditures among states. Centers in India and Mexico provided customer service and some software development to these state-administered programs, including those that handle child support enforcement and unemployment insurance. Few respondents in the GAO survey expressed dissatisfaction with the offshore providers.

The GAO reported that despite this public-sector use of offshoring, "no comprehensive data or studies show the extent of services offshoring by state governments and data for the federal government are limited." And as a result of actions taken by some states and concerns by state governments, "eight states have relocated previously offshored food stamp or TANF call center services to the U.S., and one state -- North Carolina -- has converted a previously offshored service into a state-run operation."

Give the Invisible Hand a Chance
Budgetary constraints on states should make offshoring a more attractive solution than perceived by legislators, said Justin Sullivan, manager at Ariba Consulting and a former policy analyst for the White House Office of Management and Budget. "While there is some political pressure to ban offshoring," he said, "states in particular face plenty of cost pressure to provide services mandated by the federal government [despite] strong resistance to new taxes. Offshoring lets governments provide more service for less money."

Reducing labor and other costs are not the sole consideration, said Sullivan. "We use offshore resources to extend our workday, allowing us to create around-the-clock project teams. Not only do we reduce our cost to deliver, but we reduce the number of calendar days required. In a complex software implementation, this can save months on a project and allow clients to realize a return on their investment much more quickly."

Neumont University in Utah bases its curriculum and instruction on such trends in IT architecture and business processes, and produces graduates ready to work in software development. The school's president, Graham Doxey, thinks outsourcing causes a change in the types of jobs filled in the United States, rather than a transfer to employees overseas. "The needed skill sets are shifting," he said. Programming and networking jobs that pay less are now moving overseas, while project and program management -- including business architecture and intelligence/security -- stay close to home.

Enrollment in university computer science programs is high in China and India, the leading offshore service providers, and decreasing in Japan and the United States, the two biggest beneficiaries of offshore outsourcing. As a result, there is a gap in skills and people available to fill software and networking jobs, said Doxey.

"China and India are where those skills are being developed," he said. "Outsourcing is not just a passing fad -- the economic structure will be this way for a long time."

He noted that Australia, Japan and Singapore have an even larger skills gap than the United States, a dynamic that may account for greater openness to public-sector offshoring there than here.

For state governments, most offshoring activity seems to be driven by the fact that the federal government requires the states to administer programs like food stamps, Sullivan said, while at the same time holding their contributions flat or even reducing them.

"Without being able to increase taxes, the states turn to automation and offshoring as a way to provide services and reduce the cost of technology," he said. "It's really not different from the reasons a company would offshore. Companies are squeezed by the competition and consumers, and governments by the federal government and taxpayers."

When offshoring does occur in the public sector, it's often through a U.S.-based contractor. Lee highlighted a common problem with offshoring in both sectors. "We believe a local front end is critical for outsourcing to countries like China. With few exceptions, every well known outsourcing intermediary is based in the host country, or at sthe back end. This arrangement is fraught with pitfalls, because the level of integration between front and back end is minimal."

Customers with complex technical requirements need an outsourcing model that lets business be done at the front end, Lee said, while the back end is administered by professionals experienced at dealing with the cultural nuances and government protocols of the host country.

As governments weigh the potential benefits offshoring can offer with political pressures to keep outsourcing stateside, they can look to the private sector for lessons learned and consider offshoring's potential benefits for performance and the bottom line.