EDS says offshoring great for profitability, promises to continue

Electronic Data Systems (EDS) Inc. says its outsourcing strategy is saving it big bucks and announced plans to continue with it through 2008.

The off-shore labour continues to be cheap, and talent available overseas is now at least on par with North America’s, company executives note.

Its off-shoring strategy served the Plano, Texas-based technology services company well in 2007.

It landed the number 19 spot on Fortune 500’s list of 20 most profitable tech companies by cutting costs.  Its revenue grew four per cent, and profits increased 52 per cent to $716 million for the year.

With EDS set to release its first-quarter numbers, company brass indicate that the outsourcing trend is only going to grow.

Where $19 billion was spent in 2007, more than $20 billion will be spent this year, according to EDS chairman Ron Rittenmeyer.

“It’s not just a passing fancy,” he told ITBusiness.ca. “It is a pretty major change that is going to continue. If you can find high quality talent at a third of the price, it’s not too hard to see why you’d do this.”

That sentiment was echoed across EDS executives gathered at the site of their title-sponsored PGA tournament, the EDS Byron Nelson Championship.

With 43 per cent of their employees now in off-shore locations, the driving factors behind their out-sourcing practice are North America’s rising costs and shallow talent pools compared to other global markets.

“There’s phenomenal amounts of IT talent, it may just not be in our country,” says Charlie Feld, vice president of application services. “When I talk about the talent shortage, I focus specifically on the Americas and the U.S.”

The American education system doesn’t encourage students to pursue math and science the same way other countries do, Feld adds.

Kids are losing interest in those skills at a young age despite their eager adoption of technology because they don’t make the connection between math skills and the electronics they’ve whole-heartedly embraced.

“We don’t teach it in a way that is exciting to these kids,” he says. “They picture the drudgery of writing code instead of the excitement of creating things.”

In Canada, the rising dollar has changed the bottom-line equation.

While it used to be cheaper for EDS to operate help-desks and other services north of the border, that is quickly changing, says Stewart Hair, managing director of datacenter services.

EDS calls their strategy of housing data in one place and operating it from another a “best-floor, best-shore” approach, he adds.

With thousands of client IT departments around the world in 50 different countries and 500 locations, the company is flexible to respond to rising costs or talent shortages by putting resources elsewhere.

“We’re very agnostic about specifically where we operate,” says Rittenmeyer, also the company’s president and chief operating officer.

“It depends on what the job is, what the skill level is, what we have in specific locations, and we watch increasing land costs, increasing building costs, the stability of the country and the government. You have to balance all of that.”

Their practices won accolades in 2007. The Black Book of Outsourcing pegged them at the top of their “Top 50 Best Managed Global Outsourcing Vendors” list.

They were also recognised by Cambridge, Mass.-based analyst firm Forrester Research as a leader in global IT infrastructure outsourcing.

Perhaps it is no surprise then that their biggest client and former owner, General Motors (GM), is also described as an “aggressive globalization customer” by Jeff Kelly, executive vice president for EDS North America.

With the car manufacturer facing recent challenges in Ontario related to the higher Canadian dollar, it is an example of how cost savings can be achieved by moving work off-shore.

“We’re very much a part of GM and any pain that they’re suffering,” Kelly says. GM is an example of having half employees local and half off-shore, with cost savings pursued by moving work to established EDS areas like Argentina and China.

“Don’t assume that because it is a Canadian customer, our delivery system is not based in Brazil,” he adds.

While the savings to the bottom line remain an incentive, EDS executives predict those will level out to be on par with North American costs over the next decade.

As education and the IT skills on offer continue to develop in off-shore locations, the company will maintain operations there because of the quality of the employees, not because of their lower wages.

For right now, it’s the best of both worlds, according to Rittenmeyer.

“If it costs me $20 an hour to have someone here and $4 an hour to have someone in China, and the education is pretty close, and the quality level is the same or better, I’m going to pass along a lot of that savings [to the client] and my margin is going to be the same,” he explains.

Growth areas for off-shoring this year include established EDS markets of India, China, Latin America, Eastern Europe and Malaysia, the chairman adds.

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