Friday, January 14, 2005

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When offshore outsourcing reverses course

Following the "homeshoring" meme, there are lots of reports this month about American firms souring on offshore outsourcing and reverting to onshore outsourcing instead. CNET's Ed Frauenheim has one story about tech companies outsourcing to a firm with operations in Oklahoma City. Another story takes a longer look at one homeshoring firm, Decisions Design:

Decision Design knows first-hand about the potential pitfalls of shipping tasks to India. The company launched Indian operations in 2001 but closed them down two years later. "Our offshore experience wasn't what we anticipated," Davis said in a statement. "The quality of work was lower than required, which caused rework and actually created higher costs than if we had done the work here."

The botched experiment led the company to the notion of "homeshoring centers" in the United States that nonetheless offer low costs to customers. In part by locating offices on the fringe of Silicon Valley and Chicago, the company claims that it can deliver savings of 30 percent to 60 percent below typical onshore development costs.

Decision Design, whose clients include Lehman Brothers and JPMorgan Chase, was brought in several times last year when a customer's offshore project wasn't panning out properly, O'Neill said. Offshore operations face problems, including low quality and slow project completion times, she said.

Here's a link to a press release from Housteau, third homeshoring firm, opening up a new development center in Columbus.

With rising wages in India and other offshoring magnets, expect to see more stories about this trend.

[Hold on a sec; how can you simultaneously defend the practice of offshore outsourcing but still celebrate homeshoring?--ed. Ah, but remember what I actually wrote in "The Outsourcing Bogeyman":

It is also worth remembering that many predictions [about the growth of offshore outsourcing] come from management consultants who are eager to push the latest business fad. Many of these consulting firms are themselves reaping commissions from outsourcing contracts. Much of the perceived boom in outsourcing stems from companies' eagerness to latch onto the latest management trends; like Dell and Lehman, many will partially reverse course once the hidden costs of offshore outsourcing become apparent.

I still think that offshoring, when done correctly, benefits the U.S. economy. But what we're seeing in the links above is the reversing of course.]

posted by Dan on 01.14.05 at 05:46 PM


Actually, I don't see any logical reason why thinking outsourcing could be good would necessarily mean that one thinks "homeshoring" (ruralshoring? stateshoring? inlanding?) would be bad. In fact, the overall principle seems to be the same, just slightly different values for parameters like time-difference, language-barriers, etc.

We have a lot of untapped human potential in this country, just like in the world, that gets overlooked because it's not in the right location. If the internet can't fix that, I don't know what can.

posted by: Saheli on 01.14.05 at 05:46 PM [permalink]

All you are defending, it seems, is market forces doing their thing. And if there's one thing that brings most economists together, it's free trade.

posted by: Brian on 01.14.05 at 05:46 PM [permalink]

In the IT field we're seeing the signs that India may be hitting a barrier in the number of skilled IT people available. When the offshoring boom began during the late 90's you could hire excellent and well-trained Indian software engineers for perhaps 10% of US salaries. But the numbers of these people doesn't increase that rapidly without a very well-developed and wide university system. The Indian IITs are excellent as are a few other schools, but the bench simply isn't as deep as in the US and UK. With the headlong expansion of the Indian outsourcers they have been hiring many, many less-experienced and undertrained people. Another factor is the entry of major prestigious global IT companies (Microsoft, Sun, Oracle) into the Indian labor market, which draw away many of the best Indian Software Engineers from the outsourcing companies. Thus the deterioration in the quality of their output even as their costs rise.

Another factor is the virtually total collapse of demand for IT investment in many of the largest IT-driven industries in the US (dot.coms, telecom companys, and telecom suppliers). This temporarily shrunk the US market for these services and made the market share of the outsourcers appear larger than it would have appeared during more normal conditions. With a moderate recovery in IT investment we're seeing a sharp increase in demand for competent skilled IT people in the US and UK. Contract rates in the London market are up perhaps 25% rom this time last year. Not as high as during the boom but still most satisfactory.

posted by: Don on 01.14.05 at 05:46 PM [permalink]

While anecdotal, my conversations with other
IT techies seem to show increase hiring of
US citizens by Indian consultancies. This
small datum is only from the Northeastern
part of Illinois. uhh ... Chicagoland ...
as used by that font of all wisdom - The
Tribune :-}

posted by: pragmatist on 01.14.05 at 05:46 PM [permalink]

I think that it is worth pointing out that many people fail to understand what outsourcing is all about. It is NOT simply about lower costs (that's the outcome). The lower costs arise from different management practices in how projects and employees are allocated and coordinated to accomplish a task. Outsourcing is a management innovation that addresses the “make-buy” decision across a host of activities that were previously not viewed as divisible by a company. In addition, it recognized that efficiencies could be achieved by managing these processes outside of a company's value-chain. Thus, the outsourcing innovation is not about where workers are located but about how they are managed.

Critical mass was achieved in India and abroad earlier than the US because of management issues within the US. The cost angle motivated American executives who could not and still do not grasp how to effectively managed intellectual horsepower. Outsourcing to India was a way to circumvent the issue by making it a cost issue that was structural. No company could pass up the cost savings and survive. The problem that management could not get projects out the door in a timely and cost effective manner was side stepped by creating a structural mandate.

Outsourcing is now part of Americans vernacular. Executives now better (I'm not saying the get it) understand what outsourcing is they are better able to see the costs and benefits associated with the practice. American firms can now locate the jobs in the US without directly managing them because we now have legitimized the make-buy decision and understand the management practices angle better.

posted by: p on 01.14.05 at 05:46 PM [permalink]

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