EVOLVING VENTURES OFFSHORE

As the final part of a three-phase plan, Stephen Gartside has succeeded George Hallenbeck as CEO of Englewood, Colo.-based software solutions provider Evolving Systems. Among his first moves, Gartside has established a wholly owned subsidiary in Bangalore, India, that will be key to the company's strategy going forward.

The company's restructuring plan, enacted in 2002, has thus far resulted in five straight profitable quarters. With operational costs now under control, the last phase, launched with the management transition, focuses on profitable growth. Gartside's ascension to CEO came after Hallenbeck returned to concentrate on the technical side of the business as chief technology officer.

“The main objective of restructuring was centered on restoring profitability,” Gartside said. “The second was on sustaining that profitability, and our next phase will be to grow profitably.”

The management change also included the addition of John Cullen as senior vice president of corporate development after his company, CMS Communications, was acquired in November.

Part of Cullen's responsibility will be managing the company's acquisitions. “Look for us to be active on the [mergers and acquisitions] front this year,” Cullen said.

The change from using offshore outsourcing to creating a subsidiary is key to Evolving Systems' continued success, Gartside said. “One and a half years ago, it was a matter of survival,” he said. “We had to get serious about taking cost out of our business. Had we not done that, we might not be here today.”

The company believes it can further reduce costs by eliminating the outsourcing middleman. However, cost is no longer the sole driver for creating the subsidiary, and Evolving Systems will keep 40% of its development force in the U.S.

“We are still creating solid jobs here in the U.S., and by being in control we believe we can move more rapidly and build domain expertise within the company,” Gartside said. “We were less confident about doing that in a situation where a third party could ultimately use that domain knowledge to compete with us.”

That concern is leading other software vendors to rely less on outsourcing while still trying to capitalize on the cost savings found in using offshore talent. It's also leading to some creative outsourcing arrangements.

LightSurf, which provides the software infrastructure to wireless operators offering picture and video services, employs Indian developers rather than using an outsourcer. LightSurf CEO Philippe Kahn said companies shouldn't outsource strictly for the cost savings, adding that there is risk in using a third party for development.

“What some companies are missing about outsourcing is that they are losing their know-how,” Kahn said. “When you do that, the know-how goes to the outsourcing company.”

Still, offshore outsourcing is gaining momentum and becoming a hot political issue in the high-tech community. According to Forrester Research, 3.3 million U.S. service industry jobs will move to countries such as China, India, Russia and the Philippines over the next 15 years, and with them $136 billion in wages.

As bad as that outwardly seems, only about 5% to 10% of Fortune 1000 companies consider offshore outsourcing a key element of their overall IT strategy, according to Forrester.

The primary reason companies hesitate to outsource offshore is security. Of the companies not using significant outsourcing, 64% blame security concerns.

Others are simply dead set against it. Jamie Daniel, CEO of Blade Technology, a small tech support and software development company in North Carolina, thinks its un-American.

“I understand that as you're coming out of a recession you need to minimize expenses, but what companies don't understand is the more we rely on overseas services, we will wind up in the same position we did with OPEC. Someone else will gauge how much data they let in and out,” Daniel said. “You know how the Democrats say we flew into Iraq to rescue the oil? What will they say when, in 10 or 15 years, we have to drop an army into another country to rescue hard drives?”