New Data Indicates That Outsourcing Yields Numerous Benefits Beyond Cost Reduction - InformationWeek

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IT Leadership // IT Strategy
Commentary
4/18/2006
12:02 PM
Paul McDougall
Paul McDougall
Commentary
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New Data Indicates That Outsourcing Yields Numerous Benefits Beyond Cost Reduction

A new study shows that handing IT projects to third parties--often based in far-flung corners of the globe--isn't saving corporations as much as is widely believed. Predictably, critics of the practice have been quick to seize on the report as proof that outsourcing isn't justifiable considering its supposed impact on U.S. jobs. But they're missing the point.

A new study shows that handing IT projects to third parties--often based in far-flung corners of the globe--isn't saving corporations as much as is widely believed. Predictably, critics of the practice have been quick to seize on the report as proof that outsourcing isn't justifiable considering its supposed impact on U.S. jobs. But they're missing the point.For years, corporations like GE, IBM, and Intel have held that cost is just one reason for sending technology work to India, China, or other emerging markets where workers are paid less than in the United States. Other reasons frequently cited include access to workers with skills that are in short supply in America, greasing the way for entry into new markets that represent untapped sales opportunities, having the ability to dial their workforce up or down depending on seasonal demands, and the chance to create a network of "follow the sun" tech workers to support worldwide operations.

Balderdash? That's what Lou Dobbs and other outsourcing foes think of those arguments. Big companies, they preach, outsource for just one reason: to cut costs--the rest is just window dressing. But if that were true, I suspect outsourcing would by now be on the wane given the findings published last week by TPI. The advisory firm reports that the average expense reduction achieved through outsourcing is only 15%. Not so much considering that programmers in low-cost countries earn as much as 80% less than their American counterparts. A good chunk of the differential is eaten up by overhead, says TPI. That's a lot, so you'd think CIOs would be pulling jobs back in-house in droves after not realizing big savings.

But that isn't happening. Sure, there are one-offs where companies repatriate IT work for very specific reasons--but the trend is in the opposite direction. TPI revealed that more businesses are outsourcing than ever before, despite the modest savings. Meaning, of course, that CIOs are finding lots of other reasons to outsource beyond cost. But, of course, that's what they've been saying all along--it's just that a lot of folks refuse to believe it.

To be sure, numbers are just that without some wider context or supporting evidence. Try this: I'm temporarily based in London, but consider myself a New Yorker and still keep in close contact with friends and colleagues there. Those in financial services tell me that their firms are desperate to find quality IT personnel, but there just aren't enough to go around. One friend, who runs his own small, specialized tech services firm, says he's now turning down business due to personnel constraints. And one of the gang in my weekend hockey club has resorted to using the group's bulletin board to see if anyone knows of good Unix developers for hire (much to our aggravation--what's Unix got to do with slapshots?). The department he runs at an investment bank failed to get enough resumes to fill recent openings.

Naturally, these individuals are now looking at offshore resources to staff these positions, and cutting expenses has nothing to do with it. They don't have much choice. TPI's data? It only confirms that cost reduction isn't the only thing driving the outsourcing boom--it may not even be the main thing.

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