The offshoring of enterprise apps has followed the now familiar “let’s walk-before-we-run” pattern of global sourcing. What began with the augmentation of staff programming resources is escalating into more sophisticated levels of outsourced application development, integration, compliance work, hosting, and application monitoring.

The trend toward offshoring of enterprise applications is significant for corporate IT departments eager to relieve the backlog of demand for new enterprise-resource-planning and customer-relationship-management suites; to consolidate disparate legacy applications; or even to improve software quality.

Managing Offshore has learned the pace of adoption of these globally delivered services is picking up—ever so quietly. The action mostly flies below the radar screens that scan press releases, Securities and Exchange Commission filings, and even vendor briefings. A case in point: We spoke to several customers recently who asked not to be quoted on the subject. To move beyond the anecdotal level of analysis, we teamed up with Peerstone Research, a firm that specializes in studying enterprise applications, to examine the experience of 100 U.S. corporate IT and business managers who are offshoring one or more enterprise apps.

What’s happening offshore? The Managing Offshore/Peerstone study identified activities in four main areas:

Yet there’s another macro business technology concern—standardization—that could help fuel growth in this area in the next several years. The standardization movement is not just about consolidating disparate platforms to reduce redundancies and licensing costs; there’s the perpetual question posed by C-suite executives regarding the necessity of building and maintaining differentiated back-office enterprise application services in light of the increasing availability of more off-the-shelf components and vertical-industry specific applications.

On the other hand, saving money is always good. “The basic truth is that these survey respondents are going to ERP offshoring/outsourcing to cut costs, not to drive growth or make their customers happier,” contends Jeff Gould, Peerstone’s CEO and director of research. “The indirect benefits (competitive advantage, profitability) that some users report are basically all downstream consequences of cost cutting.”

But then there’s the running-on-empty school of thought, advanced by Cognizant Technology’s John Beaumont, VP of ERP: “What seems to happen is that the ERP platform has reached a plateau and they don’t have the bandwidth to approach future projects.”

Of course, both of these gentlemen are right. Some offshore outsourcing providers, eager to build up their practices in this potential multibillion-dollar service area, are accepting deals with relatively modest profit margins, we’re told. The higher-margin offshore development opportunities in enterprise applications entail building processes and custom code for business intelligence and customer analytics—some of which may cross over into business-process outsourcing territory.

How It Begins

Once engaged, a provider such as Infosys or Cognizant sends a team to the customer’s site to conduct a form of application portfolio triage. It begins with a requirements definition, says Kakal Chandrasekhar, head of enterprise solutions at Infosys. “We need to do a scoping of the project and stakeholder interviews on site,” he says. “But after that, it’s a combination of onshore and offshore.”

For its part, Keane likes to start an engagement after the completion of an application portfolio assessment, which can take two to three months, and cost from $200,000 to $500,000 or more depending upon the complexity of the undertaking and the number of business units involved in the analysis. Payback for this investment is a no-brainer, says CEO Brian Keane, because there are often opportunities for consolidating software (and thus server) licenses and other administrative redundancies.

As you might expect, some of the most successful offshore projects begin as vanilla implementations. The vendors prefer to take ownership of efficient enterprise applications but stand ready to transform, rewrite, or replace troubled ERP or CRM software as needed. Sometimes, customers seek help from an outsourcer when the task at hand seems too enormous to go it alone. “Most of our systems are online transaction based,” says Cognizant’s Beaumont. “If customers go from a batch environment, it’s normally a big delta between where they are today and where they need to be with a skill set.”

In enterprise apps, there are few complete departmental “lift-outs” where nearly every employee assigned to related tasks is absorbed by the outsourcing firm. The employees who specialize in lower-level maintenance may find themselves with pink slips, but the programmers that possess valuable business-process knowledge generally are kept on to interface with the offshore team or to focus on entirely new applications.

Watch Out For This

Where is the offshoring of enterprise applications headed in the next six to 18 months? Infosys’ Chandrasekhar predicts that a significant amount of the R&D money will go to India. “In my view, the whole of the ERP ecosystem is shifting offshore in some way,” he says. Chandrasekhar contends that Indian programmers are either directly involved in coding significant aspects of Oracle, SAP, and PeopleSoft’s ERP applications or delivering significant feedback.

The major Indian outsourcing firms are building hosting resources in the United States and overseas aiming their guns squarely at business once exclusively earmarked for EDS and IBM Global Services, among others. While the major Indian firms may make a dent in the application maintenance and development businesses, the hosting of high-volume transaction systems in the United States seems more like a long-term intention than something likely to sweep across corporate America any time soon.

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