The 7 Myths of Offshore IT Outsourcing

Myth 1: Offshore outsourcing is costing U.S. jobs.

A recent study by the McKinsey Global Institute calculated that for every dollar spent on a business process that is outsourced to India, the U.S. economy gains at least $1.12. The largest chunk -- 58 cents -- goes back to the original employer. And U.S. companies perform 30% of Indian offshoring, so money returns home as earnings.

The U.S. has lost 2 million jobs due to global trade over the past 20 years but in just 10 years has added 35 million new jobs.-[1]

It was U.S. technology -- the boom in telephony and fiber optics -- that directly contributed to the viability of offshore IT outsourcing. U.S. innovation will remain the largest competitive advantage we have over developing nations taking on outsourced work. Many jobs that aren't materializing during the economic recovery are lost not through outsourcing, but rather through improved efficiencies and business automation.

Myth 2: There's a stigma to offshore outsourcing.

In Bangalore, India, some 110,000 people are employed writing software, designing chips, running computer systems, reading MRIs, processing mortgages, preparing tax forms and doing other essential work for U.S., European, Japanese and even Chinese companies. Intel, Cisco, Oracle, Philips and GE are among the multinationals with significant R&D facilities there.

In fact, it would be challenging to find a single Fortune 500 company that is not outsourcing any part of its daily business operations to offshore outsourcing firms. Again, it's important to note that most outsourced jobs are supporting operations that aren't part of the core competency of U.S. firms, such as phone technical support, human resources administration and software coding.

Myth 3: The cost benefits of outsourcing are overstated.

With workers in offshore locations such as India and the Philippines commanding only 10% to 30% of the salaries that U.S. workers earn (with average IT employee costs ranging from $5,800 to $6,500)-[2], there is no doubt that savings can be achieved purely from a head-count perspective. However, the greater benefit of outsourcing is the migration from a fixed-cost IT environment to a variable pricing model that allows firms to gain better control over operating costs. There will be a reduced need for software and hardware infrastructure, as well as reduced costs for maintaining and upgrading hardware and software and for training software developers on the latest technologies.

Myth 4: It's a buyer's market for IT workers right now anyway.

Most firms underestimate the true cost of hiring an internal employee. Taking an employee with a base salary of $50,000, the following additional costs could be expected:

  • Benefits (medical, dental, 401(k) plan): $18,000
  • Administrative costs: $8,500
  • Orientation/training: $1,400

Therefore, the total actual cost of the employee would be close to $78,000 a year -- a 56% increase on the initial estimate.

Myth 5: There are huge cultural barriers.

The first step involves comparing potential offshore countries. It's no coincidence that 260 of Fortune 1,000 companies have selected India as their nation of choice for outsourcing. Indians tend to have excellent English-language skills and a highly trained technical workforce due to the first-class education system.

The second course of action is to ensure that the outsourcing firm you select has in place stateside project managers who can engage both you and the offshore resources. A good project manager will facilitate communication and help define and track goals and objectives.

Myth 6: What about the other risks of outsourcing?

  • Expense of initial migration. The best method of mitigating the concern of high upfront expenses is through a transparent, closely aligned partnership. The two parties can work together to construct a business case that satisfies both sides; for example, initial expenses can be minimized in exchange for a multiyear commitment that enables the outsourcer to make the necessary investments on behalf of its client.
  • Fear of losing control. Loss of control is best tackled in a similar manner with internal departments. Strict policies and procedures can be implemented to ensure satisfactory compliance. Another way of looking at it is that the separation of duties through an outsourcing partner allows for increased, rather than diminished, control.
  • Intellectual property issues. In cases where intellectual property is a concern, specific clauses can be written into the contract to ensure protection. Clearly defined audit procedures that adhere to compliance can be set up prior to the outsourced relationship commencing. Other legal resources include nondisclosure and noncompete agreements, patents and copyrights.

Myth 7: The ROI of outsourcing hasn't been proved.

On the contrary, the ROI component of outsourcing has been shown time and time again. In fact, the greatest arbiter, the marketplace, seems to give outsourcing a resounding thumbs up. Beyond reducing head count and employee overhead, additional benefits such as faster time to market and improved quality of the finished product can achieve an ROI of over 400% in some cases.

Today, the question is not if you will outsource, but when and how.

Notes:

[1] Kirkpatrick, David. "Rage Against Off-Shoring is Off Target." Fortune Online. Feb. 9, 2004.

[2] Kumar, Vinay and David, Gabe. "Choosing a Location." Outsourcing in Financial Services. Pp. 10.

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