The Atlanta Journal-Constitution
August 1, 2004 Sunday Home Edition
Trip teaches lesson on jobs;
CEO: Offshoring costly, arduous
by TAMMY JOYNER
Sometimes the answer is right in your own back yard.
Dustin Crane traveled tens of thousands of miles from home to learn
that business lesson.
The Alpharetta executive had a decision to make: Set up shop overseas
or team up with an overseas company. Either way, clients of his
Alpharetta technology firm were pressuring him to cut costs by
sending his company’s work to overseas software developers and
programmers.
“This offshoring juggernaut wasn’t going to let up,” said Crane, 45,
who founded Aelera Corp. 10 years ago. “We said we can’t ignore it.
The pressure’s going to be so great, we better have a solution
available.”
Crane traveled to three countries to get a firsthand look at the
overseas production craze.
He had every intention of setting up shop abroad, perhaps in India
first, followed by expansion to China. Many businesses have touted
offshoring as the cheapest way to go when faced with global
competition. For some industries and in certain circumstances, it is
a money-saver.
What Crane found, though, was a lot of hidden costs and problems not
typically associated with overseas outsourcing.
“I was constantly going, ‘My gosh, this is more costly [than I’d
expected],’ ” Crane said.
It wasn’t just the unexpected extra financial costs. Sending work
overseas can be culturally and linguistically challenging, and
workers there face harsh living and working conditions.
Crane says some U.S. tech companies have to deal with on-the-job
communication mix-ups. It’s not unusual for overseas information
technology projects to arrive stateside and have to be recoded by
American workers.
“When we started adding up all of the risk factors associated with
this offshoring,” Crane said, it didn’t pay off.
So instead of sending work abroad, Aelera recently announced it will
create 250 jobs in Savannah and Fitzgerald, where software
developers, programmers and support staff will design systems that
help Aelera clients’ customers order goods and services online,
schedule appointments and meet other technological needs.
Aelera isn’t alone in rethinking the merits of outsourcing. Last
week, Delta Air Lines announced it had dropped one of three
offshoring contracts that supply call-center services overseas.
“We’re not touting this as a political move or to save U.S. jobs,”
said Crane. “This just makes business sense.”
A survey on outsourcing recently done by Aelera mirrored Crane’s
views. The survey of 216 top-level U.S. executives indicated that
half of the respondents that had overseas projects were likely to
bring the work back to the United States. The survey found the
companies didn’t realize the cost savings they had expected.
Many had expected 30 percent to 40 percent in savings by going
overseas, but the average savings were about 20 percent. One in 10
didn’t see any savings at all. One in five of the information
technology projects sent overseas ultimately failed. The biggest
culprits: poor transfer of knowledge, work quality and low morale
among their U.S. work force, which led to poor productivity overall.
The overseas outsourcing boom is working on two cyclinders. It’s
providing U.S. firms with low-cost workers and creating a level of
prosperity for many overseas workers who, in turn, are taking
advantage of their new way of life.
The surge in technology outsourcing, for one, has created a middle
class with middle-class appetites for better homes and cars and
paychecks. These sought-after workers are demanding and getting
better salaries. And that’s creating increased labor costs for U.S.
firms.
“A lot of people outsource because they think it’s cheaper,” said
Tony Greenberg, chief executive of RampRate Sourcing Advisors. “But
it’s not. They’re not looking at the hard costs or soft costs.”
Nine-month odyssey
Crane’s story goes beyond surveys and data. It began almost two years
ago and culminated with a nine-month journey through Armenia, China
and India.
He made the customary plant visits and met with officials. But he
preferred to venture off the beaten path, taking trains and cabs and
rental cars, as opposed to air-conditioned limos.
He kept a diary of his journey and often traveled in cargo pants,
tennis shoes and a Braves T-shirt. He ducked into shops and roadside
stands. He talked to street vendors, visited libraries and
universities, and talked to students. He took in the markets where
locals bartered for goods, all to get a feel for how the average
worker lives and works.
“This wasn’t a cursory blow-through as a CEO or executive,” Crane
said. “I wanted to go experience what these countries were. I didn’t
want to go as a CEO. I wanted to get my fingernails dirty.”
He found that outsourcing may work for companies with call centers
abroad, but not for a $10 million-a-year information technology firm
like Aelera. Not for programmers and developers who depend on
teamwork, business nuances and a stress-free work environment to
create software systems.
“It’s one thing to offshore call-center work where transactions last
one to five minutes and repeat 20 times an hour,” Crane said. “It’s
different to offshore a piece of work that takes two to three months
to master and maintain that momentum and productivity.”
The company takes such pains to create a conducive work environment
that once, when a database administrator was “getting bogged down” by
his commute from Lawrenceville to Alpharetta, Aelera paid to move him
and his family closer to work.
“That improved his family life and productivity,” Crane said. “That’s
what we’re focused on.”
Creating that kind of atmosphere abroad would be nearly impossible,
considering what Crane saw:
* Pollution was so thick in one Chinese town that he had trouble
breathing. High-rises seem to vanish behind towers of brown clouds.
“I felt like I was slowly suffocating. I thought, ‘This is horrible.
People have to live in this environment.’ ”
* Office space in India turned out to be more expensive in some cases
than some parts of Atlanta, and “the facilities weren’t nearly as
good.”
* Traffic jams were so bad that during one cab ride in the Indian
city of Mumbai (formerly Bombay), the driver got out, ate dinner and
returned to the taxi, which was still in the same spot where he left
it because traffic hadn’t budged. Crane was still sitting waiting
inside. To combat traffic, some companies have set up bus services to
get employees to work.
* Crane found out-of-reach costs among the so-called cost savings
touted by Armenians. When Crane asked about installing a DSL line, he
was told it would cost $5,000 a month for the service that is
normally $50 in the States.
* Workers were so jammed into cubicles that they had to tuck in their
elbows to keep from bumping each other. During a demonstration at
another firm, the presentation was interrupted by technical glitches.
At one point, Crane saw a cockroach scamper across the keyboard.
“I’m thinking to myself, ‘There’s more than one kind of bug here,’ ”
Crane said.
At times, the experience was unsettling, bringing Crane’s Western
ways face-to-face with worlds where prosperity often collided with
poverty. That was the case when he landed at the airport in Mumbai.
“It was fourth world, almost fifth world” in its appearance, he
recalled.
The shuttle waiting to take him to his hotel was an air-conditioned
BMW 740i. A minute earlier, he said “three beggars [are] saying ‘Give
me a penny.’ It’s truly a country of contrast.”
On the ride to the hotel, Crane said he couldn’t help but think:
“This opulence of the moment could feed 20 or 30 people. It didn’t
make me feel comfortable.”
Journey’s beginning
Crane’s nine-month process of elimination began in Yerevan, Armenia,
a city of about 1.25 million people.
Armenia is my first stop. I landed at midnight shocked at the dearth
of city lights below. The pilot announced, ‘If this is your first
time in Yerevan, be aware that the landing will be rough due to the
condition of the runway.’ … When the runway lights did not come on
in time, he did an abrupt fly-around for a second try. This former
republic of the Soviet Union still shows signs of its time behind the
Iron Curtain. The drive to the hotel was punctuated with random
police inspections. … It is clear the city is in need of much more
commerce. With a vibrant economy, it would be a lovely place, but
right now it is very run-down.
Crane found the city “wasn’t as alive and dynamic as we are here.”
And there weren’t enough resources, namely qualified students and/or
qualified software developers, Crane said. Universities there turn
out roughly 1,000 to 2,000 such workers a year, vs. 300,000 to
400,000 in India, Crane said.
“I liked Armenia and its people. [But] I didn’t want to bet my
business on it.”
Guangzhou, China. I tried to talk to as many [software] developers as
I could to determine both their language and skill levels. These
young people had worked hard at honing their English, but still
lacked the ability to field questions and comprehend the directions
the questions were heading … I see potential issues with knowledge
transfer, communications, business culture differences and living
conditions.
Heading by train into the Chinese seaport city of Guangzhou
(pronounced GWAN-JOW and formerly called Canton), Crane rode straight
into a huge brown cloud of pollution.
Beyond the smog, Crane was struck by how few people had a real grasp
of English, a key requirement for working with complex technology
projects.
“When you go offshore, it’s all about communication when it comes to
software. This is not paint by number,” said Crane, who speaks some
Cantonese. “You need to be able to define the problems so you can
define the solutions. Although a few were exceptional, [overall] they
were lacking in English.”
Crane’s assessment of China?
“China is going to be the place in the next 10 years. But they’re not
developed to the point of [being] ready for prime time now.”
Mumbai, Hyderabad and Bangalore, India. Suds will be my travel guide.
We have been in and out of technology parks, observing and talking to
developers. Seems like India is in the middle of their tech bubble.
People are willing to switch jobs for an extra quarter an hour. The
conditions appear to be unstable, maybe unsustainable.
India, in some ways, is becoming a victim of its emerging success,
Crane said.
The most cosmopolitan of the three cities Crane visited was
Bangalore, where workers were technologically skilled, he said.
Business is conducted in English, and the culture is steeped in
democracy. But it still had its own set of problems, starting with a
10 1/2-hour time difference.
The outsourcing and technology boom has created a middle class in
places like Bangalore, but many of the towns haven’t kept pace with
the changes. Workers are making more money. In turn, they’re
demanding — and getting — the conveniences that go along with
being middle class. There are traffic jams at 1 a.m.
“One thing India touts [is] labor rates are low,” Crane said. “What
we discovered there was a lot of additional costs.”
An engineer from a top tech university in India commands about
$10,000 a year in salary. An Indian software developer with a
master’s degree from a university in India would get about $50,000 a
year.
A U.S. engineer who has a bachelor’s degree commands about $60,000 to
$70,000 a year. An American software developer with a master’s would
get $70,000 to $80,000 a year on average. In Atlanta, the going rate
is about $70,000 for an engineer with a bachelor’s.
“If you look at the [labor] rates you could be intoxicated by the
savings,” Crane admits. “But if you looked at the entire cost …
clearly there’s a very good alternative. Many large companies say
they have no choice. They have to go offshore. We want them to hear
loud and clear that there is [an alternative].”
Aelera’s decision to stay in Georgia speaks to another trend.
Spherion Corp., a staffing company that runs call centers across
North America, said it’s seeing companies looking to smaller U.S.
markets to fulfill customer service needs instead of big cities or
overseas.
“Small American markets are ideal for companies to locate their call
centers because they offer lower-cost labor, available real estate
and attractive incentives from local and state governments,” said
Robert Morgan, president of employment solutions at Spherion Corp.
“In exchange, the town gets a thriving new business that feeds the
local economy and lowers unemployment.”