Person-to-Person Offshoring: Offshoring of Services Reaches Small Businesses and Homes

Introduction

Outsourcing of services by medium and large-sized companies from US and Europe to low-wage countries like India,
Russia, Ukraine, Romania, Argentina, and the Philippines (also known as “offshoring”) has been going on for more
than ten years now. This offshoring trend is clearly helping the low-wage countries. During the last six years, there
has been substantial discussion in the news media and academic circles around the world regarding the advantages
and disadvantages to the higher wage countries of offshoring. Experts seem to fall into two opposing camps. Some
believe in the long run, offshoring will benefit profit-making corporations and the economies of the high-wage
countries, whereas there are many others who believe this is going to be detrimental to the well-being of the
developed countries — particularly to the white-collar middle-class working in the services sector. Nevertheless,
pundits all tend to agree that some amount of offshoring is inevitable given the aging population in most developed
countries and the corresponding labor shortfall, as well as globalization and technology advances that inextricably
interlink these economies with those of lower-wage countries.

Evalueserve, a global research and analytics services firm serving organizations worldwide, highlights in this report a
new offshoring trend to watch, which the firm calls “Person-to-Person Offshoring” (PPO). The report describes how
offshoring is now beginning to go mainstream and is touching both the upper class and working class alike. This is
very reminiscent of 1991-92 when manufacturing in China and other low-wage countries began to impact the lives of
the rich and the not-so-rich in developed countries.

Person-to-Person Offshoring (PPO) consists of those services that can be offshored by entrepreneurs who are trying
to bootstrap their new organization as efficiently as possible. With technology advances and the growth of the
Internet, small offices, home businesses and even everyday individuals can utilize PPO services. These offerings
include online tutoring; website development; graphic design; database and other software development; writing and
translation services; accounting and tax preparation services; architectural, home and landscape design services;
marketing and sales support services; creating drafts of legal documents; and other administrative services.
Individually taken, each contract is often of low value – usually between $100 and $5,000 – but since the number of
end consumers and small businesses is enormous, the total addressable market in the United States alone easily
exceeds $20 billion.

Indeed, Evalueserve’s research and analysis shows that between April 2006 and March 2007, the revenue from this
sector was more than US $250 million and is likely to grow to over US $2 billion by 2015, representing a cumulative
annual growth rate of approximately 26 percent. Furthermore, because this set of consumers has diverse
requirements, the breadth of offshoring services offered is also likely to be fairly large. Many of these offshoring
trends are in the beginning of their life cycles and others only have a few early adopters so it is not clear that all of
these services will, in fact, enjoy mass adoption in the long run. Nevertheless, the value proposition of receiving such
services at a significantly lower cost and “just in time” is clearly irresistible, and therefore the overall sector shows the
promise of rapid growth.

Dominant Business Models in Person-To-Person Offshoring

The following two business models are being used for providing PPO services:

Direct Interaction Model:

In the first model, the “individual” client signs a contract directly with a vendor in a low-wage country and this vendor has employees (e.g., tutors and administrators) who are working on a full-time or a part-time basis, or as sub-
contractors. Since these contracts are of low monetary value, the “individual” client usually cannot travel to the offshore location or perform a costly due-diligence process, and therefore is exposed to some risk. Although
payments can be made through checks or wire transfers, since the cost of individual projects is fairly low, clients
usually pay the vendors with credit cards, which do help in offsetting some of this risk.

Online Marketplace Model:

In the second model, the vendors providing PPO services enrol in an online marketplace by paying a monthly
subscription fee plus a fixed percentage of the revenue if they win the project through this marketplace. So, when an
individual client posts requirements for a new project to be conducted on the online marketplace, the marketplace
communicates these opportunities to the selected vendors and freelancers and requests proposals to be delivered to
the client. The client then awards the work to the appropriate vendor depending on price (which may be on a per
hour or a fixed cost basis), delivery time and a quality score provided by other clients who have been served by this vendor. In this model, the online marketplace typically earns between 5 percent and 15 percent of the contract price in return for an assurance of a minimum service level from the vendor, thereby reducing the risk for the client. Clearly, if the project is an ongoing project (e.g., continuous administrative service support) then the client and the vendor are likely to go around the marketplace in the long run. This model therefore works well only for ad-hoc or on-demand projects that are limited in scope and size.

Evalueserve’s research estimates that, currently, there are more than 90 online marketplaces on the World Wide
Web and, cumulatively, they have over 500,000 vendors and freelance professionals who are providing these
services from low-wage countries. Four of the larger marketplaces are briefly described in Table 1 given below:

Table 1: Prominent Online Marketplaces for Services

• Guru.com: Guru.com, a Pennsylvania based company, seems to be the largest marketplace with more than
  625,000 registered vendors and freelance professionals and with more than 60 percent of these coming from
  low-wage countries. Guru follows a “closed auction” model of bidding and hence the vendors cannot see each
  other bids. Usually, after a project is completed, the final work-product is sent to Guru’s “Workroom,” which is
  only accessible to the contracted parties. To reduce their risk, the clients can use a “SafePay Escrow” service
  that protects the interests of both the client and the vendor during the execution of the project; this is clearly very important since these two parties are likely to be located in two different countries.
• Elance.com: Elance.com, a California based marketplace, is known for its outsourcing solutions supporting
  medium to large enterprises and has approximately 80,000 registered vendors and free-lance professionals. Of
  these, approximately 50 percent are from low-wage countries. Unlike Guru.com, Elance has an “open auction”
  bidding system, which implies that each vendor can adjust its bid after seeing competitors’ bids. Elance does not
  have an escrow service but the buyers and vendors are somewhat protected by a third-party arbitration service
  called “Square Trade.”
• RentACoder.com: This is a Florida based marketplace that has more than 175,000 registered freelancers who
  only do coding of software programs. One of its main attractions is its escrow and arbitration service. More than
  80% of these programmers are from low-wage countries. Its bidding model is a “closed auction” model and the
  client awards the project based upon the freelancer’s or vendor’s price, qualifications, references and schedule.
• GetAFreelancer.com: This marketplace is owned by a Sweden based company, Innovate it. Most of its
  freelancers are also IT programmers from low-wage countries. On this marketplace, the buyers decide whether
  to allow closed or open auction bidding and the marketplace also provides a payment escrow service.

Types of Person-To-Person Services being Offshored

Although there are several dozen PPO services, given below is a snapshot of ten to watch:

Online Tutoring Services

India based companies like Transtutors, Career Launcher, Educomp Datamatics, and Tutor Vista, are providing
online tutoring for school and college level studies and for GMAT, GRE and SAT preparations. In addition, they also
offer one-on-one “live” homework assistance over the web and provide essay writing guidance and help with
educational content. However, because of accent and cultural issues, most of the online tutoring from India is
generally being restricted to mathematics and sciences. Furthermore, most Indian tutors work from their homes using a broadband connection and therefore the overhead for these companies is substantially lower, and they typically charge between US $8 and US $40 per hour. None of the online marketplaces that Evalueserve reviewed provide online tutoring as an option, which is not surprising since online tutoring requires an ongoing relationship between the student and the tutor and hence is more amenable to a subscription-based model rather than a project-based model.

Accounting, Finance and Tax Preparation Services

These services include accounting & bookkeeping; budgeting & forecasting; cost analysis & reduction; financial
planning and reporting; and tax preparation services for individuals, small businesses and home businesses. Most of
these services are primarily provided through online marketplaces, although some firms in India (e.g., Xpitax,
SurePrep, Outsource2India, CCH, IFR, Datamatics, OPI and kpoexperts.com) are also providing these services
directly to individual clients, especially helping them with preparing US tax-forms (e.g., 1040, 1065 and 1120). Since
these firms can hire well-trained accountants, who can strictly adhere to well-codified quality management practices,
they usually end up providing a fairly high quality product. However, because of liability and license-related issues, these Indian firms cannot file the completed tax forms directly with the US government; but instead send these to an appropriate Certified Professional Accountant (CPA) in the US or to the individual client for review and filing. Typical prices for these management, finance and tax-related services vary between US $12 to $30 per hour. It is interesting to note that this trend just indicates further “democratization” of another trend. The big four accounting firms – Price Waterhouse Coopers (PwC), KPMG, Ernst & Young, and Deloitte & Touche – have been outsourcing accounting and tax related work to their captive centers in India (for some time now), but their end-clients to date have been primarily large and medium size organizations rather than individuals and small businesses.

Home Design and Related Services

These services include computer-aided design, architectural drafting, interior home design, landscape design and
drafting, and preliminary drawings for electrical, plumbing, heating, ventilating and air-conditioning systems. A few
companies from India currently providing these services include Satellier, BluentCAD, ASE Designsoft, Exceed
International, and DimensionICAD. Additionally, there are several hundred freelancers who are providing these
services on various online marketplaces and most are charging between US $12 and $30 per hour. However, just
like tax preparation services, most of these services have liability and license-related issues, and hence these vendors and freelancers do not certify these drawings themselves; but instead send these to an appropriately-licensed architect, a professional engineer or the “individual” client who reviews, certifies, and files them.

Editorial and Writing Services

These services include academic writing; children’s writing; copy writing; creative writing; editing & proof-reading;
grant writing; summarization of news articles; creating newsletters and press releases; writing proposals; drafting
resumes; drafting speeches; technical writing; translation; creating web content; and writing white papers & articles.
Some companies providing these services from India include Creative Lipi, VMG-BPO, Webspiders India, Vogue
Advertising, and Netscribes. Like online tutoring, these tasks do not require expensive infrastructure and involve fairly
low risk. Hence many of these professionals work from their homes with a broadband connection and given the low
overhead, these vendors and freelancers can charge fairly low rates between US $10 and $25 per hour. Although
this sub-sector could grow quite rapidly, it is still in its nascent stage because of cultural and idiomatic challenges and
because Indian English is considerably different than American or British English.

Graphics Design Services

These services include the design and layout of annual reports; banner ads; billboards & signs; brochures; business
cards; letterheads; catalogs; collateral; datasheets & press kits; corporate identity packages; logos; package design;
page & book layout; and photo retouching. From India alone, there are more than 50 vendors and 200 freelancers
providing these services, some of which include SmartData Enterprises, Virtuosoonline, Inforlinx Solutions, and
Webgrity. One interesting sub-sector within this area provides cursive handwriting and calligraphy services to create
handwritten business cards, invitation cards for weddings and other parties, menu cards, special envelopes, and
certificates. Like online tutoring, these tasks do not require much infrastructure and involve low risk. Again, many of
these freelancers and vendors work from their homes and charge between US $10 and $25 per hour. Unlike other
areas, this area does not have significant issues related to English usage and accent, and therefore is poised to grow
very rapidly.

Transcription and other Administrative Support Services

These services include data entry; fact checking; development of mailing lists; personal assistant and secretarial
work (e.g. scheduling appointments and maintaining calendars); presentation formatting; word processing; and of course transcription. Indeed, there are more than 300 vendors out of India alone who have substantial number of full- time, part-time and sub-contractors providing legal and medical transcription. Again, since these services do not require much infrastructure, the overheads are usually low and vendors and freelancers from low-wage countries
(especially India and the Philippines) provide these services for US $8 to $15 per hour.

Software Coding and Other IT Services
These services include software application development; database development; coding and maintenance in Linux,
Java or C+ environments; networking related services; animation; writing scripts & utilities; IT security; system administration; and technical support. There are more than 5,000 vendors and more than 300,000 freelancers in low- wage countries like India, Russia, China, Ukraine, Pakistan, Bangladesh, Belarus and the Philippines who provide these services and charge between US $12 and $30 per hour. Indeed, because of the enormous competition among vendors and freelance coders, online marketplaces seem to work very well for these tasks, especially if the projects are one-time or ad-hoc in nature. On the other hand, small businesses and home-offices often end up reducing their costs by circumventing these marketplaces if their projects are long and continuous in nature.

Website Creation and Maintenance Services

These services include web-site design; e-commerce site design; flash animation; HTML email design; internet
marketing; online forms & database integration; search engine optimization; usability & interface design; web hosting; and web programming. Just like the software coding area, there are more than 5,000 vendors and more than
300,000 freelancers in low-wage countries like India, Russia, China, Ukraine, Belarus and the Philippines who
provide these services and charge between US $12 and $30 per hour.

Marketing and Sales Support Services

These services include writing business plans; email & direct marketing; lead generation; conducting market
research & surveys; telemarketing, and help with public relations. Currently, there are more than 100 vendors and
more than 300 freelancers providing these services from India and since these freelancers can work from their home
offices (as long as they have a broadband connection), they typically charge between US $10 and $25 per hour.

Other Ancillary and Concierge Services

A few companies such as Future Net (a subsidiary of the Alaphuza, India-based Future Groups) are experimenting
with providing ancillary and concierge services from low-wage countries. In their model, the end-client registers on
their website and agrees on a price. Future Net then provides the following kinds of services: Entry, storage, daily
upgrades and warehousing of personal data; debugging, restructuring and archiving of software; day-to-day
accounting and bookkeeping, auditing and editing of personal accounts; transcription for deeds and documentation,
financial deeds, legal documents and property deals for customers or for their family members, children, and friends.
Other services would include payments made to utility service agencies, educational or other institutions; and
purchase of simple items such as movie tickets, personal computers, and electronics equipment. Indeed, it is too
early to say whether these concierge services will be embraced over the long term.