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How Exactly Is Outsourcing To China Going To Be Better Than Outsourcing To India?

June 7, 2005

According to yet another study, this time from DiamondCluster International, "buyers of outsourcing services in growing numbers are dissatisfied with offshore service providers." Why? Probably because their customers are dissatisfied with offshore outsourcing. Other studies have borne these facts.

But the most striking part of the study is this: "China rapidly emerging as next offshoring hot spot. In 2004, only six percent of survey respondents said they planned to establish offshore operations in China. Today, that number has soared to 40 percent."

 OK, let's get this straight. "Hey, guys! We can save a bundle of money by going to India! We can offshore our customer service, pay them one-tenth of what we pay U.S. agents, and take home huge, fat bonuses with the money we save! It's a "win-win" situation." (What happens if there's more than two partners in such positive negotiations? Does it become a win-win-win-win-win-win situation?)

Next came, "Uh, oh, guys...throw out your yacht brochures...it turns out that customers don't like offshoring to India or the Philippines. Shockingly, it appears that the people there don't speak English with an American accent, or necessarily know the latest 'American Idol' stats! Open up the call center in Cincinnati again!"

But wait...there's more. "China is the new hotspot! Let's outsource to China!"

This, to me, proves once again that commen sense is seldom applied at upper management levels in U.S. businesses.

Do the people who designated China "a hot spot" remember that:

1) Doing business within the borders of a Communist country, no matter how market-friendly it is, carries inherent risks? India is democratic and has a court system similar to our own. What's it going to be like navigating business legalities in China, where "Because we said so" is still considered an acceptable legal verdict?

2) Chinese agents are no more likely to speak English that is intelligible to the average American than Indian agents...probably less so, in fact.

3) India is our friend...China is, at best, a tense acquaintance; at worst, a potential "small cold war" adversary. Read the papers.

The fact that ANYONE could believe that what didn't work in India will work in China boggles the imagination.

Here ends my rant for the day. Clearly, I need a bit more coffee.

TES

Outsourcing Industry At A Crossroads: Annual DiamondCluster Survey Finds Customers Questioning Value

Early terminations double; offshore outsourcing satisfaction rates plummet 17 percent

Buyers of outsourcing services in growing numbers are dissatisfied with offshore service providers, prematurely terminating contracts and struggling to harvest the full value of their outsourcing relationships -- even as many of those same companies plan to increase their level of outsourcing over the next 12 months, according to new research by DiamondCluster International (Nasdaq: DTPI), the global management consulting firm

According to DiamondCluster International's 2005 Global IT Outsourcing Study the number of buyers prematurely terminating an outsourcing relationship has doubled to 51 percent while the number of buyers satisfied with their offshoring providers has plummeted from 79 percent to 62 percent.

"The blame cannot be heaped solely on the shoulders of providers," said Tom Weakland, who leads the outsourcing advisory services practice at DiamondCluster. "Many buyers are now several years into at least one outsourcing relationship, but they still lack effective measures to gauge the success of their outsourcing initiatives, which are critical for knowing and getting what you want."

DiamondCluster's third-annual study was the first in which any buyers reported that they are planning to reduce their outsourcing spending. Seven percent will decrease onshore outsourcing and five percent will do the same with offshore outsourcing.

As for outsourcing's benefits, the re-allocation of internal resources to more critical functions was the benefit of outsourcing buyers most often cited (83 percent). Cost savings, generally considered the primary driver of outsourcing decisions, was only second in the DiamondCluster study.

"This finding underscores several things we see going on in the market," Weakland said. "Companies are learning that the tremendous cost-savings outsourcers have been promising are actually very difficult to achieve. And they are learning more about the cost of losing good people and the value of their institutional knowledge."

Other key findings from DiamondCluster's 2005 study of companies that outsource and the vendors who provide IT outsourcing services, which are expanded upon below, include:

40 percent of buyers expect to outsource some IT functions to China over the next three to five years compared to eight percent last year;

88 percent of buyers remain concerned about employee backlash, but worries about anti-outsourcing legislation and political pressure have waned;

DiamondCluster's "2005 Global IT Outsourcing Report" details the findings of surveys and in-depth discussions with 210 senior IT executives at global 1000 companies and with 242 senior executives at outsourcing service providers in the United States, India and other countries. Research was conducted in late 2004 and early 2005. Copies of the complete study are available on request by sending e-mail to: outsourcingreport@diamondcluster.com

China Rapidly Emerging as Next Offshoring Hot Spot In 2004, only six percent of survey respondents said they planned to establish offshore operations in China. Today, that number has soared to 40 percent

"China is starting to look like India did 10 years ago," Weakland said. "As outsourcing capability in China takes off, it will put deflationary pressure on the traditional providers of commoditized outsourcing services and set an entirely new price point. The most aggressive providers are establishing operations in China now to grab market share. Taking a wait-and-see approach is not an option.

Countries that appear to have fallen out of favor, according to the data, are Israel and Russia.

Providers Keep the "Face of Outsourcing" Out of Sight While worries about anti-outsourcing legislation and political pressure have dropped dramatically from 85 percent to 50 percent, concerns about backlash from employees, customers and the public persists. Eight-eight percent of buyers remain concerned about employee reactions to outsourcing, 67 percent fret about employee severance costs, 66 percent about customer reaction and 65 percent about negative publicity. Sensitive to buyers' concerns, providers limit their onsite presence to keep the "face of outsourcing" out of sight from employees, according to the study.

"Interestingly, buyers are not overly worried about the impact of competitor criticism or union pressures on their outsourcing endeavors," said DiamondCluster's Weakland. "We feel that this shifting mindset shows outsourcing has become integral to today's business strategy."

Despite war, terrorism and mounting tensions in the Middle East, buyer perceptions of global stability have improved. In 2004, 78 percent of buyers said that concerns about global stability were impacting their outsourcing decisions, but today that number has dropped to 68 percent.

Larger world conflicts are concentrated in regions not typically known for outsourcing and concerns about reactions here at home are taking precedence, according to Weakland.

Providers Get Smart About Pricing

Buyers offered conflicting viewpoints on pricing of providers. While the majority believes rates have remained consistent, 25 percent believe they have increased and 22 percent believe they have declined.

"Providers have worked hard to remove cost as a key differentiator and it appears to be working," said Weakland. "Traditional industry pricing benchmarks are becoming less reliable as an indicator, therefore, buyers must be willing to balance costs and value when negotiating price."

Conclusion

Summing up the major findings of the DiamondCluster 2005 Outsourcing Study, Weakland said: "The organizations we studied make it clear that outsourcing is here to stay, but they are still struggling to execute an optimal sourcing strategy. One-off, transactional outsourcing deals haven't yielded the expected results.

"The future of outsourcing is dependent upon the ability of buyers to think about sourcing IT talent strategically and in using the appropriate metrics to confirm that they are deploying the right resources

internal or external for the right functions," said Weakland. "In turn, it will be up to providers to meet and exceed buyer expectations, or risk losing important contracts.

DiamondCluster International (NASDAQ: DTPI) is a premier global management consulting firm that helps leading organizations develop and implement growth strategies, improve operations, and capitalize on technology. Mobilizing multidisciplinary teams from our highly skilled strategy, technology, and operations professionals worldwide, DiamondCluster works collaboratively with clients, unleashing the power within their own organizations to achieve sustainable business advantage. DiamondCluster is headquartered in Chicago, with offices across Europe, the Middle East and South America. To learn more visit

www.diamondcluster.com.
Buyers report that the greatest risks of outsourcing include the increased complexity of managing relationships, reduced operational effectiveness, and lower quality of output from their outsourcing providers.


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