Offshore outsourcing experts search for ‘captives’

TORONTO – Canadians are still “dabblers” in offshore outsourcing despite the 2.4 million jobs that are facing increased competition from lower-cost global rivals, experts warned a conference hosted by the Information Technology Association of Canada on Monday.

According to an updated report called A Fine Balance: The Buying and Selling of Canada published by PricewaterhouseCoopers offshore outsourcing won’t automatically lead to 2.4 million job losses. However cost pressures and demand for skilled resources may mean Canada will continue to lag behind other countries in terms of productivity. The report also indicated that those Canadian firms which are moving work offshore prefer to use their own employees in remote locations rather than a third party, a concept they referred to as “captive outsourcing.”

Robert Scott, the leader of PwC’s Canadian IT advisory practice, said captive outsourcing complicates a trend that is already difficult to track statistically with any accuracy. The PwC report, he admitted, was compiled with a small sample size of about 60 interviews, research data from IDC Canada and other sources such as the OECD.  The result is mostly anecdotal evidence, he added.

“There’s no reason to put out a press release if I’m just moving things around within my own company,” Scott told the one-day ITAC gathering, which was an executive forum focused on Canada’s place in the global economy. “What we found is that the closer the work is to the end customer, the more likely the outsourcing would be captive.”

David Ticoll, an independent analyst who co-authored the report, said high-tech vendors are surprisingly pessimistic about offshore outsourcing, with 39 per cent responding to survey questions that it is a model that will have a negative short and long-term impact on Canada’s 15.4 million-person workforce. Companies outside the technology sector were slightly more optimistic, with 57 per cent seeing a positive long-term impact.

The attitudes may explain why more Canadian firms haven’t shifted functions in IT, finance or purchasing to business process outsourcers in developing countries such as India, Ticoll said. “We talked to a person at one firm who said his clients included most banks, but that most (outsourcing deals) they do are shy of $10 million,” he said. “Canadians are dabblers in outsourcing. That was the way it was consistently described.”

Canada has often been touted as a good “nearshore” partner for many firms in the U.S. due to the two countries’ linguistic and cultural ties, but Ticoll highlighted OECD data that showed Canada slipping from second place to 13th place as an exporter of business services between 1995 and 2002. Scott said Canada’s best opportunity as a nearshore partner will depend on work that involves a lot of interaction between users and those delivering the service. 

“You can modularize (the processes around) haircuts, but you can’t move them offshore,” Ticoll said.

While much of the initial discussion around offshore outsourcing concerned programming and other IT work, sessions at the ITAC Forum were devoted to what was called a “global delivery model” for a range of functions, including R&D. For example Frederic Boulanger, president of Macadamian Technologies Inc., discussed how his Ottawa-based firm, which was already providing third-party product development services, began working with firms in Eastern Europe and the Middle East.

“We were as good as the next firm at churning out code and running test cases, but we couldn’t make up for x-times the difference in wages,” he said. Macadamian has adopted the offshore model two years ago and now regularly forms teams composed of designers, testers and managers to work on projects, Boulanger added.

Ticoll observed that even if Canadian firms are turning over IT work to local outsourcers such as CGI or IBM, there’s a good chance those firms are handing off some of it to offshore partners. Canada tends to invest about 43 per cent on IT per worker than the U.S., which also hurt’s the country’s ability to develop more efficient business processes and compete for global work, he added.

“We need to capture this data about job losses (from offshore outsourcing) every month, the same way we do employment data,” he said.

ITAC recently acknowledged the growing influence of Indian-based technology providers by signing a memorandum of understanding with NASSCOM, its local equivalent. A formal reception to mark the alliance will be held Monday night.

Comment: [email protected]

–Illustration by Suzanna Min

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