Enterprises Are Spending More On Packaged Application Work Overseas

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August 01, 2003 (2:42 PM EDT)

Enterprises Are Spending More On Packaged Application Work Overseas

For a long time, enterprises have contracted with companies overseas for legacy application development and for maintenance and management of software, but a growing number of companies are also looking to outsource work related to package applications that run their businesses, a high-tech research firm said Friday.

With potential cost savings as high as 60 percent, sending IT work overseas, particularly to companies in low-wage countries, has become mainstream. Researcher Gartner Inc. predicts that by the end of 2004, 20 percent of IT jobs within U.S. enterprises will be handled by workers overseas.

While outsourcing is becoming commonplace, the kind of work heading overseas is not what many people would assume.

Beyond software development, maintenance and management, much of the discussion within enterprises revolves around call centers and business process outsourcing. The latter refers to an insurance company, for example, moving its entire claim processing to India. Such a move involves contracting for labor, software, hardware and a data center.

But research firm Gartner found those areas are not where companies are spending their money. Instead, they're signing contracts to have overseas labor handle modifications to packaged applications from Oracle, Peoplesoft, SAP and Siebel Systems. In addition, foreign developers are adding capabilities, such as sales force automation, to these applications, and are providing ongoing support.

"This is the next big thing," Gartner analyst Frances Karamouzis said. "Although everybody is talking about BPO and call centers, we're not seeing a lot of ink on deals. Where we are seeing ink is in this particular area (packaged applications)."

Gartner estimates that 20 to 30 percent of new contracts going offshore are for work on packaged applications. As much as 60 percent is for the traditional legacy application development and software management services. The remainder is for a variety of other services, which include BPO and call centers.

In a recent rating of offshore companies, Gartner found those specializing in call centers and BPO received low marks because of a failure to garner much business. Many of these companies were subsidiaries of larger organizations. "They're really small companies," Karamouzis said, noting that nearly all of them had revenues of under $5 million.

In its offshore vendor analysis, Gartner rated companies headquartered in India, the dominant player in the offshore market, and in the United States.

None of the companies got Gartner's highest or lowest overall ratings, a "strong positive" or "strong negative," respectively. Three Indian companies, Tata Consultancy Services, Infosys Technologies and Wipro Technologies received the second highest rating, "positive." Of the U.S. companies rated, only Cognizant Technology Solutions rated positive. All other companies received Gartner's middle-of-the-road rating of "promising."