• Posted by: Technology Staff Editor
• On: 11/16/2007 09:48:08
• In: Information Technology

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Rising labor costs offshore and logistics challenges have led to a reduction in outsourcing and offshoring of IT contracts and IT work

Chances are diminishing that your CEO will ship your job overseas or hand it over to one of the big outsourcing suppliers

IT workers can breathe a little easier. Chances are diminishing that your CEO will walk in tomorrow and decide to ship your job overseas or hand it over to one of the big outsourcing suppliers.

TPI, a British management consulting firm, determined that the global outsourcing market has experienced a slowdown starting at the beginning of the 2007. The total value of worldwide outsourcing contracts awarded during this time dropped by 17 per cent compared to 2006 numbers and represents the smallest number of awards in the first three quarters of any year since 2001.

Looking inside these numbers, one finds that the slowdown is attributed almost solely to changes among US companies. TPI found a 53 percent reduction in the value of major contracts in the US from 2006 to 2007. Wow! So what is causing the precipitous drop?

No More Cheap Labor

Let's begin with the reasons why companies started to turn to outsourcing, which boomed during the dotcom rise. Cheaper labor was one of the reasons why corporations opted for outsourcing services. At the time, salaries were rising along with dotcom stocks. Since then, there has been an adjustment, so paychecks are no longer totally whacked.

In addition, outsourcing has made the labor pool in other countries more expensive. India is one area where many jobs have been sent. As a result the country now finds itself with a growing number of middle class citizens who want to be paid. Also the rupee, India's currency, has been gaining strength: trading at about 46 rupee for every dollar now, compared to 41 for every dollar a year ago.

Such changes are important because observers estimate that three out of every five US outsourcing contracts involve some kind of offshore activity.

The Hidden Costs

In addition, companies have determined that the cheap foreign labor often comes with hidden costs, mainly centering on overcoming cultural barriers. The challenges begin with instituting simple business processes. Then there are different legal statutes in various countries that companies need to comply with.

Add to these difficulties the logistical challenges of offshoring. Coordinating work among employees spread across a dozen different time zones is more troublesome than making an allowance from the East Coast to the West Coast. Also an Indian employee may call the home office on July 4th and be surprised that no one is answering the phone.

While technology theoretically provides companies with a way to deliver the same level of service as domestic workers, that hypothesis has not always proven to be true. Call centers were one of the first areas that corporations decided to outsource, where cost saving measures such as adoption of VoIP is taking a toll.

Overseas call center agents connected via VoIP lines, are not as clear as domestic connections. Beyond some basic training, the agents do not have the skills to pick up on cultural references, and customers become frustrated if the agents' English is not clear.

IT Support: No Longer Mission Critical

Outsourcing was viewed as a way to simplify IT deployments and management. The rush to the Internet led to a dramatic rise in networking functions as well as the addition of new Web-based applications. Many small and midsize businesses felt overwhelmed with the workload and demands by top executives to get new Web applications up ASAP.

Since then, most companies implemented these applications, the technology refresh phase has slowed, and vendors have made significant strides in easing product installation and maintenance.

Outsourcing suppliers have struggled to deliver on many of their promises. While many claimed to be able to dynamically adjust to a company's changing business requirements, some have not been able to deliver on that promise. To make their own business viable, outsourcing suppliers need to take a cookie cutter approach to delivering their services, with little or no tailoring to clients' needs.

IT Workers' Jobs Are Safe

The inability to meet customers' ongoing needs is seen in the fact that companies are not re-signing outsourcing deals as they expire. TPI found that re-signed agreements accounted for just 18 per cent of the total value of major contracts globally signed in 2007. The 82 per cent of total contract value represented by new deals constituted an increase of over 21 per cent on this time last year.

Companies are also being more cautious in their approach. They are signing shorter term deals. Rather than hand over their IT needs to a third party for 10 years, they are inking shorter deals. They are also slicing up the outsourcing pie into more pieces. Rather than providing one vendor with complete control of a mega-contract, they are employing a multi-sourcing model, the theory being that different vendors will keep each other honest.

Outsourcing was once portrayed as a panacea to IT challenges. The fact that many such claims have proven hollow means IT employees can walk over and shake the CEO's hand rather than head for cover when he approaches them.