Offshore Presence Could Be Good For U.S. Services Firms

As offshore outsourcing causes concern about preserving U.S. jobs, it's a trend that's clearly yielding healthy returns for the country's IT services companies.

They should produce better earnings ratios than competitors that have operations limited to the domestic front, says a report issued last week by Schwab Soundview Capital Markets. The reason: Offshore service centers tend to operate more cheaply than support sites in the United States and Europe.

"Companies aren't saving 80% in India like some reports would have you believe, but the cost advantages are still significant. So if you're not in India, you are not cost competitive," says Schwab Soundview analyst Cindy Shaw, who co-authored the report with analyst John Jones.

The average operating margin for services firms with extensive offshore operations, such as IBM, Accenture, and Affiliated Computer Services, is about 21%, well above the industry average of 14%, the report says. Low tax and labor rates in many offshore locations help make operations more profitable. "Offshore capability will separate the winners from the losers," Jones says in the report.

The impressive revenue gains posted of late by indigenous offshore providers such as Satyam Computer Services, Tata Consulting, and Wipro Technologies won't be sustainable unless those companies move beyond application development and maintenance work into higher-end services."Ten years ago, there were hundreds of PC companies that failed to move up the value chain" and, as a result, no longer exist, Jones says. He also notes that U.S. service providers with a diverse global footprint could benefit more from offshore outsourcing than foreign firms as CIOs look to obtain outsourcing and other services from one provider.