Budget Woes Could Boost Government Offshoring

Growing budget constraints could force state governments to seek the potentially cheaper alternative of hiring offshore outsourcers to run IT systems.

In 2005, the New Jersey legislature tried to put the brakes on IT offshoring by passing a law requiring that all state work be performed in the U.S. It was one of the most restrictive measures ever passed by a state. But try as it might, New Jersey couldn't escape the impact of globalization.

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For instance, IT contracting firms that use H-1B workers are among those that bid for the state's IT work. Adel Ebeid, New Jersey's chief technology officer, believes that such contractors are able to offer competitive bids in part because they use H-1B workers who "are willing to settle for an hourly rate that would not be tolerated by other folks."

"I think the availability of H-1B visas is driving down hourly wages," he said.

New Jersey's offshore restrictions are atypical among state governments. Indeed, most states don't bar the offshoring of IT work but avoid it because of political pressure.

There are exceptions, though. Virginia, for instance, has signed contracts with offshore vendors for application development work. And some analysts believe that other states will be more receptive to offshore outsourcing as budget pressures increase.

New Jersey's offshoring law doesn't allow it to exclude people who are legally working in the U.S. The state awards contracts based on service and price, officials said.

The judiciary branch of the state's government last year awarded a services contract to Astir IT Solutions Inc., a South Plainfield, N.J.-based firm that received federal government approval for 160 H-1B visas between 2006 and 2008. Astir officials were not available for comment.

While the New Jersey Judiciary does use H-1B workers, it claims that it wouldn't offshore work under any circumstances. CIO Jim Rebo said that the court system's IT projects couldn't be run offshore even before the 2005 legislation for security reasons. "We have almost never contracted to do work off-site, let alone offshore," he said.

Money Talks

Ebeid said workers with H-1B visas are particularly prevalent on application development jobs, and contractors on such projects may have rates of $65 to $70 per hour, which is less than the hourly rate generally paid to U.S. workers.

But can states resist outsourcing in the long run as they try to cut costs? Wipro Ltd., a Bangalore, India-based outsourcer, believes IT departments can save money using its remote infrastructure managed services.

The service, which is similar to ones offered by other outsourcers, generally includes the remote monitoring and management of most IT assets, including data centers, networks, security systems and application software. Typically, technology infrastructure outsourcers keep the data centers in the U.S., while the IT operations are mostly handled offshore.

GK Prasanna, senior vice president of technology infrastructure services at Wipro, estimates that such offerings can cut infrastructure costs by as much as 25% over the length of a five-to-seven-year contract.

Prasanna said that many Wipro customers "no longer feel uncomfortable" with outsourcing infrastructure services, though observers suggest that state governments may still be reluctant to embrace the model.

Gartner Inc. estimates that the remote infrastructure management services market, which now stands at about $17 billion worldwide, will grow by about 21% annually through 2012.

Strings Attached

In 2005, the state of Virginia signed a 10-year, $2 billion agreement to outsource its IT infrastructure. But the deal required that the contractor, Los Angeles-based Northrop Grumman Corp., keep the data centers -- and IT personnel -- used to fulfill the contract in facilities located within the state. In fact, approximately two-thirds of Virginia's 850 IT workers took in-state jobs with Northrop Grumman.

Under the contract, Northrop Grumman runs the state's data centers, help desks and other IT operations.

When the agreement was signed, Virginia officials said that about half of the state's IT equipment was more than eight years old and the contract was a way to get a massive upgrade and to consolidate IT operations without having launch a 10-year project to replace the older systems. The state had estimated the replacement costs at about $200 million.

Chris Dixon, an analyst at Input, a Reston, Va.-based government market research firm, said that Virginia remains a "test case" on infrastructure outsourcing.

However, he believes that as more states move to consolidate IT operations, interest in infrastructure outsourcing will increase.

Meanwhile, some of President Barack Obama's appointees to top federal IT posts appear open to the use of offshore resources for at least some government projects.

Take Aneesh Chopra, Obama's pick to be the nation's first-ever CTO, for example. Chopra was Virginia's secretary of technology when the state signed a 2007 outsourcing contract for content management development with HCL America Inc., a unit of Noida, India-based outsourcing firm HCL Technologies Ltd.

At the time, the Virginia Information Technologies Agency said it would allow work under the contract to be performed at HCL facilities in India. The officials said that the contract was awarded to HCL because it offered the "best value" compared with competing bidders.

The earlier contract with Northrop Grumman was signed just prior to Chopra's appointment as the state's secretary of technology.

The other top technology officer appointed by Obama, federal CIO Vivek Kundra, signed a similar deal with Advanced Integrated Technologies Corp., a Washington-based company with operations in India, in his previous position as CTO of the District of Columbia.

Advanced Integrated Technologies and a city employee were implicated in an alleged bribery scheme in March, but the White House concluded that Kundra was not involved, and he retained his federal post.

Keeping It Local

Outsourcing is still an uncommon choice for state governments, which tend to award contracts to in-state businesses that may or may not use H-1B workers, Dixon said. "They prefer that money to go back into the local economy," he added.

New Jersey's anti-offshoring law can help keep money in the local economy, and the state's IT workers employed, said New Jersey Democratic State Sen. Shirley Turner, who authored the 2005 law. Turner said in an interview that she wrote the legislation after watching vendors set up IT shops overseas. She also noted that she had spoken with programmers whose jobs had been outsourced or were lost to workers with H-1B visas who were paid less.

Critics of such legislation argue that it could lead other countries to make similar moves, which could increase IT costs and eat up tax revenue that could be used on other projects.

Ebeid contends that under the New Jersey law, the state is paying a fair price for work that's awarded to contractors operating in the U.S. Ebeid also said that he believes offshoring wouldn't be considerably cheaper -- though he conceded that he couldn't provide data to back up that assertion, because the state doesn't seek bids from outsourcers looking to take work offshore.

He noted, however, that the state continues to select IT vendors based both on technical competence and the projected cost to taxpayers.

Today, observers say that it's difficult to know exactly how much public-sector IT work goes offshore. For example, support services included with packaged application products purchased by a state may be handled offshore.

Meanwhile, the TechServe Alliance (formerly the National Association of Computer Consultants) analyzed federal labor data on IT-related occupations and found that IT employment peaked last November at 4.06 million jobs. By the end of April, that figure had declined to 3.87 million, the alliance said.

Companies "are still cutting, and I think there will be some more cuts," said Steve Watson, international chairman and managing director of recruiting firm Stanton Chase International in Dallas.

But Watson also noted that he's optimistic that hiring will resume by the end of 2009 due to a pent-up demand for corporate and government IT projects.

This story, "Budget Woes Could Boost Government Offshoring" was originally published by Computerworld.

Copyright © 2009 IDG Communications, Inc.

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