Offshoring Arrives on Wall Street

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UPDATED: Offshoring: U.S. IT workers reject it, U.S. IT companies embrace it. Now U.S. investors will weigh in on the topic as more tech companies prepare to test the markets for public offerings, including another on-demand software player.

PeopleSupport, a Los Angeles firm handling tech support from centers in the Philippines, filed paperwork today for an $86.25 million IPO. Shares will be sold on the NASDAQ market under the ticker symbol “PSPT.” The filing does not specify the number of shares or price range.

The news came on the same day that RightNow, an on-demand software vendor, filed for an IPO that could raise about $60 million. The company’s filing comes as another software-by-the-seat vendor, Salesforce.com, inches closer to its IPO and could help set the tone for how on-demand software providers are received by Wall Street and investors.

In late December, Salesforce.com filed to go public, kicking off a run of filings and giving Wall Street an early spring about vendors of CRM software on-demand.

On the tech support side, PeopleSupport’s largest clients — ISP giant EarthLink , travel site Expedia and domain registrar Network Solutions — accounted for 88 percent of its business last year, according to its filing.

Last year, the company notched $30 million in revenue and $8 million in net income. PeopleSupport, which counts HP and Novell as investors, has four offices and two data centers in
the Philippines, as well as two data centers in the United States. It
maintains a fiber-optic network between the two countries for fast, secure
communication.

In addition to help desk services, PeopleSupport is looking at
back-office tasks, such as credit and document processing.

“We provide significant value to our clients by offering services at a
substantially lower cost than U.S. outsourcing centers and at a quality
level that we believe is often higher than other offshore locations,” the
company wrote in its prospectus.

The planned IPO comes amid fierce debate over IT offshoring. U.S.
workers, fearing the loss of high-paying jobs decry the practice and question the
quality of overseas work.

U.S. firms, looking to cut costs and farm out non-core work, are
increasingly turning to China, India, Russia and other countries while at
the same time downplaying offshoring moves to avoid any backlash at home.

An IDC study found U.S. companies spent $16.3 billion on offshore
technology services last year. The research group expects that figure to hit
$46 billion by 2007.

The issue has attracted political attention too, popping up on the
presidential campaign and in Congress, where lawmakers representing
districts with large tech workforces craft legislation aimed at rewarding
firms that create new jobs and punishing those who shift work to other
countries.

PeopleSupport is well aware of the volatile political climate and
addresses it as a risk factor for potential investors.

“Offshore outsourcing has become a politically sensitive topic in the
United States, particularly in the light of the upcoming presidential
election,” the company said in its filing. “Recently, many organizations and
public figures have publicly expressed concerns about a perceived
association between offshore outsourcing providers and the loss of jobs in
the United States.”

PeopleSupport won’t be the first firm specializing in offshore
outsourcing to go public. The best known is probably India’s Infosys which boasts a market value of nearly $11 billion. The company
recently announced a 3-for-1 stock split.

Meanwhile, RightNow Technologies is hoping that there is high demand for shares in on-demand software companies.

The Bozeman, Mont.-based provider of customer service, support and call center software hopes to raise $60 million, according to its Form S-1 registration statement with the SEC, filed today. RightNow delivers its products via the Web on a subscription basis, a model that’s gotten hot as IT budgets have started to expand.

RightNow’s customer service offering supports multiple communication channels,
including Web, interactive voice, e-mail, chat, telephone and outbound e-mail. It also keeps a comprehensive record of customer interactions, something that’s a plus in on-demand offerings, said Sheryl Kingstone, a Yankee Group analyst. She pointed out that Federal regulations require many enterprises, including financial service and health care organizations, to keep copies of customer records. While such companies aren’t precluded from using hosted applications in which, typically, their data resides in a partitioned area of the ASP’s database, the reporting does add another layer of complexity, she said.

On-demand applications have become accepted because the offerings are mire mature, Kingstone said. “There are more on-demand and more hosted applications every day. What matters to larger enterprises is the growth of the application itself,” she said. “More functionality combined with the ability to customize in-house make on-demand a more viable option for more sophisticated corporate users.”

Kingstone warned businesses not to use hosted applicants simply as band-aids. “If you’re looking to solve a particular pain point, like customer service or marketing, you can use a hosted solution,” she said. “You need something, sign up, and tomorrow, you’ve got it.” However, while the market now is in a phase of such tactical implementations, Kingstone said businesses should evaluate how ASPs fit into their five-year technology roadmaps.

RightNow shares will trade on NASDAQ under the ticker symbol RNOW; the company hasn’t priced the shares or determined the number to be sold. Morgan Stanley & Co. will act as sole book runner for the offering; Thomas Weisel Partners will act as co-lead manager; Adams, Harkness & Hill and D.A. Davidson & Co. will be co-managers.