Domestic Outsourcing

Over the past few years, despite overall growth in the worldwide outsourcing marketplace, a growing number of US-based companies have terminated their offshore contracts or allowed contracts to expire and transitioned the work back to the US. With the strong value propositions and ironclad cost savings of offshore solutions, why is this happening?

Long ago, the US was the undisputed information technology hub of the world. However, over the past few decades offshore firms have developed a technology-rich labor base at a much lower cost basis, leading to hundreds of offshore outsourcing projects annually. Outsourcing migration gained steam as domestic companies pursued large development and/or support cost savings abroad - in the 40-80% range. Many domestic US service providers were challenged to compete as cost of labor increased due to increased technical needs (e.g. Y2K, dot-com, etc.) and later, a severe decline in enrollment in technical degree programs in US universities diminishing the size of the upcoming technical labor pool.

Offshore outsourcers were proud to tout value propositions that included cost savings, strong technical capabilities, optimized methodologies and processes, faster time-to-market, ability to redeploy in-house resources and the ability to allow companies to focus on core competencies. However, don't be fooled, very few decision makers were compelled to outsource for improved customer satisfaction, quicker time-to-market or business transformation without cost savings.

Hundreds of offshore outsourced engagements have generated billions of dollars annually for successful outsourcers. This influx of revenue over time has produced measurable inflationary behaviors abroad, driving increases in the cost of goods, services and labor and thus narrowing the fiscal advantage of offshoring projects. Though the average hourly cost for a foreign resource is less than that of a comparable domestic resource, the gap has narrowed considerably.

Additionally, instead of streamlining operations and producing a superior product or service, offshore projects often entail a more complex engagement model requiring more senior management involvement and more project management acumen, challenging communication channels, threatening security and unforeseen additional costs. Additional costs often stem from misdiagnosing the base case translating to overlooked or unrealistic savings that are components of the most comprehensive, complex pricing models. Most companies do realize cost savings, but far less than expected and with much more effort.

Can the US compete in outsourcing on a global level? Forecasters agree that enrollment in technical programs domestically are on the upswing. Domestic outsourcers are taking advantage of highly technical recent graduates. They are investing in locations near major universities and in rural areas of the US that have growing IT labor markets to create a capable IT labor force to compete with offshore providers. These fertile talent areas often realize labor costs that are approximately 50% of those found in major metropolitan areas. This can dramatically reduce the labor cost window compared to an offshore provider. Also, companies making investments in local development and support facilities are eligible for tax breaks in certain regions when meeting reasonable criteria. Lastly, domestic outsourcers provide enhanced security, cultural and language commonality, favorable communication channels such as the ability to easily meet with an outsourcer in person and a shorter ramp up/transition phase.

Domestic outsourcing may not be the panacea and not all offshore outsourcing engagements fall short of expectations. In fact there are hundreds of offshore outsourcing successes, but now more than ever, it is only under the right circumstances where offshore outsourcing delivers fully upon the promised value proposition and the desired cost savings. If cost savings is your primary driver, think carefully about engagement governance, ease of communication and other potential inconveniences that will have to be managed on a daily basis. Give consideration to domestic outsourcing as it may be the perfect fit for your outsourcing strategy.