Nov. 12 issue - Catherine Owens was in the market for a few good programmers. Little did she know that the coding cavalry would turn out to be sitting 4,495 miles away. The director of software products and services at Xenergy of Burlington, Mass., needed to update a very old software product. Although no stranger to outsourcing such work, she was surprised when her search ended with Vested Development-a nearby firm that uses programmers in Russia. "I'd heard some bad stories about companies' pitching you about doing [the work] so cheaply, and then you ended up spending double or triple the initial quote," Owens says. But Vested won her over. "They came back with a quote about a third of what U.S. companies were offering, and they did a better job."

SO MANY COMPANIES like Xenergy are outsourcing work overseas that the concept no longer seems, well, foreign. What was once considered a cheap yet lesser alternative to U.S.-based consulting has become a significant labor force for corporations of all sizes. Software projects using overseas developers can save a company 30 percent or more. Much of the savings is due to low wages and inexpensive office space that more than make up for the high cost of communications and Internet connectivity. Add the technology and education infrastructure in such countries as India and Russia, and you have outsourcing heaven.

"They can be 20 or 30 percent better, and they get 60 percent less salary. They're hard workers: they spend lots of hours and they have a huge commitment to deadlines and success." - EREZ HENDELMAN

Overseas developers are often more productive. Erez Hendelman is an Israeli who based his company, Oblicore, in Herndon, Va., and yet for savings has all research and development done outside Tel Aviv. The Israeli programmers, who often start young and develop ferocious work habits doing their required Army stints, simply do more, and for less. "They can be 20 or 30 percent better, and they get 60 percent less salary," says Hendelman. "They're hard workers: they spend lots of hours and they have a huge commitment to deadlines and success." The programmers also come with practical experience and discipline gained during military service. By using American sales and business-development expertise, Hendelman gets the best of both worlds.

The same logic applies to India, the world's premier outsourcing location. "India graduates the largest number of scientists and engineers in the world," says Kumar Mahadeva, CEO of Cognizant Technology Solutions, a Teaneck, N.J.-based Dun & Bradstreet spinoff with development teams in India. The prevailing wages allow Cognizant to charge 50 to 60 percent less than its competition, says Mahadeva. India enjoys other advantages. "They have solid experience, English proficiency and strong government support for this industry," says Frances Karamouzis, a Gartner Group research director.

Other countries have different degrees of readiness for outsourcing. "We think China is behind India as the next great hope, because of the large labor pool," Karamouzis says. It's also cheaper. Some companies prefer Russian programmers, known to be some of the most talented in the world. "During the height of the cold war, the United States was spending less than 8 percent of its GDP on the military-industrial complex," says Brian Phelps, CEO of Vested, which has resources in Ireland as well as in Russia. "The Russians were spending more than a third. Because of that difference, and because of their society, their educational system was largely created to churn out technical graduates. They then got out in the work force and found no jobs. I'm constantly surprised the taxi driver taking me to my hotel has a Ph.D. in quantum physics."

While outsourcing abroad may be cheap, it has its downside. "The problem with many big countries is multiple layers of bureaucracy," Phelps says. "It takes 29 official stamps to do anything." Political instability also takes a toll, and in some countries, like Russia, results can be wildly inconsistent. "We at Gartner cannot in all conscience recommend to some of our clients that they use resources from Russia," says Karamouzis.

Outsourcing is now expanding beyond the giant countries. Truth Technologies, a start-up designing antifraud software for the banking industry, outsourced its actual product development through a Virginia company, iDevco, to developers in Budapest. "In our experience, iDevco was able to deliver on time and less than 1 percent over budget," says Egide Thein, a principal investor in Truth Technologies. "The disadvantages were not visible to us."

Catherine Owens saw the disadvantages very clearly, though, particularly in communications. "I think I probably spend more time communicating than I would have expected," says Owens. "There are some things we go over three times." Extensive work with overseas clients in the past helped prepare her. She knew, for example, that humor would not translate well into other languages. "There are basic common-sense things you would do speaking with someone for whom English was a second language," she says, such as avoiding pop-culture references or complex syntax.

There are also challenges caused by local conditions, such as lack of a broadband connection to the United States. Local laws can be a problem, too. If disputes arise between client and consultant, remedies may be so impractical as to be unavailable. But some problems like time-zone differences, which can make phone communications a challenge, can be turned into an advantage. "You can almost build a 27-hour day," says Owens. "They're working in shifts. I'm getting e-mails at the end of my business day, and you know that's getting really late for them."

Even the scarcity of state-of-the-art computers provides an advantage to a work force that has had to be inventive. "People were more creative [under communism] because they worked outside the boundaries of what was considered possible," says Sean Ellis, managing director of World Source Advantage, a Budapest company that matches corporate clients with Eastern European programmers. "Suddenly you have a 10- or 20-year leap in technology, and they're able to push it to the boundary."

What the overseas firms have in technical acumen they often lack in business savvy. Relatively few of the outsourcing companies have sales and marketing groups outside their home countries. Many seem to rely on bulk e-mails blindly sent to find work. Some of the offshore consulting groups are forming alliances with companies in the United States and elsewhere that can provide marketing savvy.

Such alliances could potentially hurt U.S. companies and IT professionals who increasingly find it difficult to compete on either price or quality. "It will erode their profit margins and clearly diminish their market share," says Karamouzis. "U.S. firms really need to move quickly and be proactive." Or the next programming language they learn may be Hindi.

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