The Offshore Proposition by Eriq Lindquist

Vivek Paul, Vice Chairman of Wipro Technologies, the $1 billion India-based outsourcing company, told me a very interesting story. When his 1995-model car recently needed a repair, he dutifully clipped a coupon from a Silicon Valley newspaper offering 20 percent off the regular service rate. When told that even with the discount the rate would be $92 per hour, he couldn't help think, "For 30 percent less than that, I can get engineers who can design a brand-new car rather than fix this old one."

In that automotive nutshell may reside the impetus that drives the outsourcing industry, of which Wipro and its customers are a part.

As I'm writing this, the excesses of Enron and Tyco have not yet worn off and the phenomenon of the regal chief executive appears ready to re-emerge. Yet here's one of the top players in the hot-seat position at an international company who clips coupons and is frustrated that the repair rate is too high for his last-millennium automobile. There's more: Paul works in a simple office, sees no need for a bevy of handlers and betrays a concern for the bottom line at his company—a concern as intent as his desire to get his car fixed at a reasonable rate. All in all, you can see why the software engineer shouldn't be the only one worried about outsourcing.

Maybe outsourcing should start in sumptuous executive suites where catered lunches and a moat of handlers prevent chairmen from understanding the needs and expectations of their customers. How many layers of management and administration does an executive need in an era when many technology products are sold because they promise to speed decision making and reduce management stratification?

Once again, the repair labor rate, even with the discount, was $92 per hour. A mechanic should be able to charge what the market will bear, but an automobile manufacturer or dealer should not count on making up for lost margins on car sales by nailing the consumer on service costs.

The rising costs of services for anything containing electronics and the difficulty—often the impossibility—of performing the service yourself is a major reason customer service is racing to offshore sources.

Somewhere along the line, service stopped being, well, a service and started being a profit center. Once the bean counters took hold of the equation, they started to look for ways to charge users more for service while having their company pay less for it. The next thing you know, you're talking to someone in Manila about your cranky computer. Designing systems that don't need service because they work as expected would be the best service offering vendors could develop.

Paul, when confronted with the expensive service charge, realized he could hire a designer back in India for 30 percent less than the mechanic was going to charge for servicing his 9-year-old car. Indeed, the next stage for offshore outsourcing will not be merely offering customer support, nor will it be carrying out work necessary to build products. It will be in conceiving and designing the products themselves.

Paul acknowledged this trend in our conversation when he said one of his next goals is to develop business understanding and consulting skills within Wipro. And what is the next stage after that?

Once the offshore companies realize they have the business development, design, manufacturing and service skills, they'll begin asking themselves just what their U.S. partners are bringing to the table. This will bring about the emergence of new competitors among companies that were once partners, which, I predict, will be a hallmark of the technology market over the next year.

This election year is due to amplify the entire outsourcing issue beyond its current relatively small (OK, I know it doesn't feel small when you are the one being outsourced) percentage of the U.S. technology marketplace. When outsourcing companies become competitors throughout the product cycle, traditional U.S. vendors will have to show that they have learned more from outsourcing than just how to transfer costs. They will have to show they have learned how to develop products that meet customers' needs without a $92-per-hour service bill attached at the back end.