Traditional Offshore Outsourcing on the Skids

By Pam Baker

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Offshoring appeared to make sense in pre-recession days when customers were viewed as commodities and local job preservation as little more than a quaint notion. Then along came a global recession that made cost-savings a grim necessity and offshoring neatly fit the bill. Post recession, consumer behaviors and opinions are shifting radically and offshoring is becoming a dirty word. Ugly and persistent consumer backlash was inevitable as local job preservation rocketed from businesses' quaint notion to consumers' prime concern.

Consumer resistance has had an effect. "Offshoring is still thriving, but you may not hear about it much anymore as many companies want to stay quiet on where their call centers and operations are located for fear of backlash from the US," explained Scott Archibald, managing director of Bender Consulting. "One trend is to relocate call centers back to the US or to English speaking locations."

Governments, suffering from shrinking tax bases and outraged constituents, are also applying anti-offshoring pressure.

"Under pressure from constituents, politicians have removed large tax incentives and tax breaks enjoyed by the companies that have sent jobs overseas," said Jim Paul, managing director with Staffing Technologies in Atlanta. "Companies like IBM, Dell, Hewlett-Packard and many other large manufacturing companies are feeling the heat and have amended their strategies."

U.S. H-1B, L-1 visa reform under a new border security appropriations act also discriminates against offshore outsourcing providers, critics and advocates alike say, as it penalizes Indian IT service providers while ignoring US IT service providers who are also heavy users of H-1Bs like IBM, Accenture and UST Global.

Rocked by smaller margins, stagnant sales, shrinking budgets and staggering staff reductions, enterprises still reach for outsourcing as a coping mechanism but they do so with a jaundiced eye.

"Rates have increased and there are many issues related to communication barriers and quality of work relative to the standard of work being performed onshore," said Paul. "Poor quality and rework has caused the true cost of offshoring to increase."

This has changed buyer preferences considerably. According to a Gartner report, buyers will remain price-sensitive, particularly for IT services they perceive as basic, but they will look for smaller, shorter-duration contracts. Risk-averse customers will want transparency and predictability from their service providers, which will increasingly guarantee outcomes and price.

Hard won

Enterprises now possess hard-won experience with offshoring and a near-savage level of sophistication in structuring deals. Gone are the days of bait-and-switch tactics where offshoring companies could present educated talent to land the deal only to switch to unskilled workers when the project began, for example. Gone too is the theory that cheap labor is the alpha and omega in outsourcing models.

"Outsourcing is still alive and well, but it has a new name: cloud computing," said Archibald.

Public and hybrid cloud computing is really just another way of saying outsourcing, said Archibald, only better as you have the ability to get more granular in what you outsource. "For instance, in the early days of outsourcing, IT departments had to pretty much cut off portions of their infrastructure services to be outsourced," he said. "However, now IT departments have many more choices on what they can outsource and to what extent."

Offshore providers have also learned a lot in the school-of-hard-knocks and many are ahead of the curve on cloud adoption. They believe embracing the trend -- rather than bucking it -- to be the better survival strategy. "We agree that cloud services are an important part of the outsourcing industry's future," confirms Renato Mendonca, PMP Service delivery manager for Stefanini IT Solutions, North America. "This is something outsourcers are already embracing."

Embracing cloud and other changes in IT is a last-ditch effort to save outsourcing in geographies where it is clearly dying. "In some ways, offshore is a victim of its own success," notes Doug Mow, senior vice president of marketing at Virtusa. "On the provider side each successive dollar of reduction is becoming increasingly difficult to achieve as margins continue to erode," explains Mow. "Providers are looking to new geographies and lesser skilled resource pools to meet the demand."

Both of those strategies place client projects at risk: "Is it worth moving a 500 person operation to a less stable geography with less skilled resources to save ten cents per hour? At some point the risk outweighs the financial benefit," he said.

The job drain from outsourcing hubs like India is having the same dire economic consequences as the previous US job drain has. When India saw its heyday in offshore outsourcing, a middle class formed and grew. The Indian market for goods and services then climbed steeply. But then Indian workers began to expect higher pay, better benefits and improved working conditions. That meant the Indian labor market was no longer cheap enough and the outsourcers began to offshore, as well. Now that the jobs are disappearing, the Indian market for goods and services will shrink.

Enterprises are thus affecting entire markets by moving large chunks of jobs from one country to another. Sometimes this presents a short-term advantage, for example, when companies move jobs to form emerging markets which then replace mature or saturated markets. Outsourcing jobs to China, for example, opens access for goods and services to a generally under served and previously protected market and thus improves the potential for increased sales for the enterprises that outsource there. But even China looks too expensive now and Vietnam has become a more attractive cheap labor pool. However, continually moving outsourcing from country to country as soon as job markets begin to thrive leaves a large unemployment wasteland behind and a continuous realm of tight margins ahead as cheap labor has very little buying power.

This has not escaped the notice of enterprises looking to build margins again -- primarily by appeasing customers in order to increase their spend. That means ditching or hiding their offshore outsourcing.

"Many companies have pulled some portion of their jobs back to the US and complemented that with work being done near-shore," said Paul. "Jobs that once went to India, China and Russia are now being moved to places like Costa Rica and Panama."

This strategy is better received by U.S. customers and "removes the time zone differences and communication constraints faced by companies in the US."

The answer then, as to whether outsourcing is dying is no, but it is radically changing.

"Companies are looking for alternatives to the usual outsourcing solutions and some are saying outsourcing is dead," said Mendonca. "But outsourcing is about saving money so, while outsourcing will continue to undergo changes, outsourcing will not go away."

Outsourcing providers, however, will have to seriously up their game to survive in this new reality. "Reducing costs are table stakes now," said Mow. "The providers that can also deliver solutions that truly impact and improve their customers' businesses will be the winners."

A prolific and versatile writer, Pam Baker's published credits include numerous articles in leading publications including, but not limited to: Institutional Investor magazine, CIO.com, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, NY Times, and Knight-Ridder/McClatchy newspapers. She has also authored several analytical studies on technology and eight books. Baker also wrote and produced an award-winning documentary on paper-making.