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What The World Is Flat Means to IT Outsourcing

The days of lump-sum outsourcing deals and blunt offshore labor arbitrage are gone. The future is about disaggregating IT processes -- and then figuring who is best equipped to handle them and where they are located. Here's how to do it right.

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By Ben Worthen

May 01, 2007 — CIO — Nandan Nilekani, CEO of the outsourcing firm Infosys and the man who inspired the phrase “the world is flat,” is pushing a new mantra that could become just as universal:

“Work will be done where it makes the most sense.”

Relaxing on the couch in his Bangalore office, Nilekani points out that his own company has offices in 39 countries around the world. And it’s not alone. Wipro, another large India-based IT services company, has eight offices in Europe alone, and TCS, the IT services arm of the Indian conglomerate Tata, has 10 development centers and 10,000 consultants in the United States and Canada.

Meanwhile, providers we identify as American are no longer so. IBM now has 53,000 employees in India (up from 4,700 five years ago), and Accenture (which is actually based in Bermuda) will soon have more employees in India than in the United States and delivers its infrastructure and hosting services from 15 delivery centers scattered in countries across the world, including China, Argentina, Slovakia and the Philippines. In other words, as sourcing has gone global, so have sourcing companies.

And it hasn’t just spread. It’s evolved. Sourcing isn’t just about finding cheap labor anymore. Yes, you can still take something, ship it offshore and probably save a few dollars. “But cost in and of itself isn’t going to get anyone a competitive advantage,” says Tom Sanzone, CIO of Credit Suisse.

The New IT Supply Chain
The new model is more refined and complex. Today, IT services companies take work, break it down into pieces, and perform each piece in the location that offers the best combination of skill, cost, quality and manageability. If, for example, a new insurance application requires frequent contact with underwriters in New York City, any of the emerging global providers can do it there. But if there is a component of that work that only requires cheap coders, these companies will do that component in China, or if they need to speak Spanish they’ll do it in Costa Rica or Spain. “This is the future,” says Nilekani. “IT is being disaggregated. Slice by slice, the whole model is changing.”

With change comes opportunity for CIOs, who can tap into the global network that the outsourcing companies are building to improve quality, gain the flexibility and agility to respond to business changes faster, and, yes, save money. The outsourcing vendors have spent the past several years establishing centers of excellence dedicated to specific tasks—Java programming or business intelligence, for example. This allows for economies of scale and maximizes the chances that someone will find a way to improve the process. It also means that outsourcers have assembled deep rosters of talent, organized by skill and experience, that most CIOs cannot match. “I can’t think of any IT organization that has skilled people just sitting on the bench,” says Alan Boehme, CIO of Juniper Networks. “What you are really talking about is building a variable cost model for your IT organization.”