Michael Kovach

Monday, 22 August 2005 12:52

Low-cost domestic outsourcing

Every day, high-quality U.S. jobs are moving overseas. Because of changes in technology and communication, highly skilled jobs in software development can be done remotely, and are moving to places like India and China, where labor rates are much lower. From the auto industry moving manufacturing facilities to Mexico to textile companies manufacturing their goods in Asia, offshoring has become commonplace in many industries.

The case for the offshore outsourcing of IT services can be compelling when you look at labor rates alone. Organizations do have an obligation to shareholders, customers and employees to survive and remain competitive, even if this means reducing costs by outsourcing.

The question, then, is not “Should U.S. businesses take advantage of lower costs?” Instead, the question must be, “Can IT services provided by U.S.-based technology professionals be competitive?”

The answer is “yes.”

Many firms jumped on the outsourcing bandwagon after hearing tales of miraculous cost savings. Work that would cost $100 an hour in the U.S. could be done for $20 an hour in India. For some firms, offshore outsourcing did work and did reduce costs. However, for many others, offshore outsourcing held unforeseen costs.

When we look closely at offshoring, we find that it is not an apples-to-apples wage comparison. There are many hidden costs to consider. Cultural factors — such as language barriers, time zone differences and cultural misunderstandings — are the most obvious problems. Political factors, such as military tensions, infrastructure failures, geopolitical risks and issues with foreign legal systems also make offshoring less appealing. Other factors, such as quality control, compliance, institutional knowledge gaps and loss of control can further lessen offshoring’s appeal.

Organizational incompatibility causes problems as well. Many offshore IT vendors possess level 5 SEI Capability Maturity Model (CMM) certification. However, a procuring organization certified at CMM level 3 must consider whether its own internal processes are mature enough to stand up to the demands of a level 5 supplier.

Don’t forget the costs of data communication and travel expenses. And, finally, add in the fact that demand for labor in India — where 90 percent of offshore IT work is done — has increased dramatically, causing double-digit wage increases and high employee turnover.

All of these costs increase that low initial billing rate, reducing potential savings significantly.

Clearly, there is a strong case for using offshore services for those firms that have worked out the kinks. However, for firms which have had a bad experience with offshoring, who face public backlash because of offshoring or who cannot use offshore resources because of intellectual property concerns, there is another alternative: low-cost domestic outsourcing centers.

Low-cost domestic outsourcing centers offer a compelling alternative to offshore outsourcing. There are many places in the U.S. with a cost of living that is below average and that is significantly lower than the high-tech centers of Boston and San Francisco.

Often these areas are populated with ex-military personnel, retirees and students who not only have the same technical education as overseas IT workers, but have more professional experience. This U.S. work force is diverse, well-educated, experienced and competitive.

In addition, strong relationships with local universities and vendor partners help keep costs low. And since services are provided domestically, clients can rest assured that deliverables are fully secure and compliant with U.S. regulations, business laws and practices.

The cost of labor is only one factor in the cost of production. It is critical that decision-makers consider all of the factors that go into making up that advantage. With the development of a cost-effective solution for IT services that is based in the U.S., the comparative advantage may well reside on our own shores.

Mike Kovach is director of delivery at CIBER’s Philadelphia office. Reach him at (303) 220-0100 or at mkovach@ciber.com.