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Debunking 10 Myths of IT Offshore Outsourcing

By Robbie Nakatsu and Charles Iacovou
December 13, 2004 12:00 PM ET

Computerworld - The basic tenet underlying offshore outsourcing is that when it's possible to do work cheaper somewhere else in the world, it will migrate there. Understandably, some politicians have assailed the offshore outsourcing trend because it's presumed to take jobs away from Americans.
All too often, the issues surrounding IT offshoring have been oversimplified by the media and politicians. At times, offshore outsourcing has been used as a rallying banner for all that's wrong with the U.S. economy.
Based on our review of business trends, reporting in the business media and a host of analyses from industry experts, we believe there is evidence to suggest that offshoring can lead to domestic job growth, not reduction. By adding value and enabling growth, offshoring can lead to organizational expansion with improved employment opportunities in the U.S. Here are 10 myths about IT offshoring, and our brief analysis of each.
Myth 1: IT offshoring is a new phenomenon.
Despite the recent media attention on offshore outsourcing, the shift of IT work from high-labor-cost countries to more efficient producers abroad has been going on for years. The offshoring of IT began in the 1980s with the transfer of hardware work (the production of computer chips) to Asia. Since then, U.S. companies have shifted their emphasis on higher-value microprocessors. This shift, combined with globalized production and international trade, resulted in IT hardware that's up to 30% less expensive than it otherwise would have been.
Myth 2: Offshoring is the one strategy a company should pursue to reduce software development costs.
Offshore outsourcing is but one strategy, albeit a very important one. We believe that the emphasis on offshore outsourcing for overall cost reduction of IT projects doesn't consider the myriad approaches that can make the software development process more efficient. For example, unified programming environments, automatic programming, graphical programming and computer-aided software engineering may speed up the complex software-development process.
Myth 3: IT work that's shipped overseas will stay there.
Much of the IT work that's being shipped overseas won't be retained by the offshore destinations. There are two major reasons for this prediction: First, since a portion of the outsourced work tends to be routine and artless (such as telephone help desk support), it's likely to be automated in the future. Second, as more work shifts overseas and the demand for skilled IT workers increases abroad, wages and other benefits will increase. In turn, this will raise the cost of outsourced operations and will lessen their attractiveness (in terms of cost savings) to domestic companies.
Myth 4: Offshoring will result in significant unemployment in the technology sector.
While the offshoring of IT jobs is likely to adversely affect certain IT professions (such as low-skilled programmers) and vendors that provide IT services at prices that aren't globally competitive, there is evidence to suggest that IT offshoring could have a positive impact on employment in the U.S. technology sector.
By providing income to foreign professionals while keeping their own product prices low, U.S. companies are able to sustain their competitiveness vis-a-vis foreign high-tech firms and to sell more of their output to consumers abroad. By increasing their competitiveness, U.S. companies will be able to expand their business and employee pools, both domestically and abroad. Second, while a small sector of the IT labor pool is likely to be hurt by offshoring, this impact is likely to be small. Given that the labor market in the U.S. has more than 130 million workers and that millions of jobs are created and eliminated every few months, the impact of this projected change isn't likely to be very significant.
Myth 5: IT wages will fall across the board because of foreign competition.
Not all IT workers have been equally affected by the offshore outsourcing trend. According to a recent study by Foote Partners LLC, pay for basic application development has fallen by 17.5%, while pay for U.S. project managers has risen by 14.3%. The most successful and highly paid IT workers will be those who are able to effectively manage teams of programmers scattered across the globe.
The IT work environment of the future will be extremely dynamic, requiring workers to quickly learn technical skills; continuous training will be the order of the day.
Myth 6: It will become less necessary to teach programming and other technical skills to college students because these skills won't be in such high demand in the U.S. anymore.
Given the substantial value that's created domestically through offshoring (see Myth 4), we expect that the teaching of IT-related skills will be more important than ever, despite the hit that the discipline has taken over the past year. In terms of growth, six of the 20 projected fastest-growing jobs are expected to be in the IT sector. Moreover, as lower value-added jobs go abroad, there will be a shift toward innovative applications. The demand for highly skilled programmers will increase as a result.
Myth 7: By hiring programmers overseas, companies can lower development costs by 80% or more.
In IT offshoring, the main driver is the reduced labor rates that companies pay their employees abroad. While the foreign labor rates may be indeed up to 80% lower than the ones paid to employees in the U.S. (especially for low-skilled labor), additional costs must be incurred by U.S. companies while transferring and managing IT work abroad.
Such costs include vendor search, negotiation and contracting expenses; severance costs for laying off U.S. workers; reduced productivity because of morale issues; and efforts to complete the knowledge transfer to the vendor. Ongoing overhead can also be substantial. Because of these additional transfer and management costs, the actual savings is more likely to fall in the 15%-to-30% range.
Myth 8: Quality is lower in offshore IT operations.
While some critics of offshoring have argued that the quality of foreign IT services is lower, evidence suggests that some offshore destinations can produce high-quality IT work.
Some foreign IT operations have invested heavily in sophisticated IT development processes and strict quality controls. More than 60% of vendors with best-in-class IT certification capabilities (i.e., CMM Level 5) are in India. And in a recent review of 100 programming projects, researchers found that programs coded in the U.S. contained three errors per 100,000 lines, while the equivalent error rates for India were virtually the same (3.3), and those for Japan were significantly lower (0.5).
Myth 9: Only routine and mechanical IT tasks are candidates for offshore outsourcing.
Increasingly, companies will look toward offshoring more strategic applications such as ERP implementations, e-commerce applications and business process re-engineering projects. As discussed in Myth 8 above, offshore quality can be just as good as domestic quality. As foreign operations gain more experience with U.S. companies, they will become more adept and offer even higher-quality services.
Myth 10: It's always best to outsource IT work to developing countries with a large, low-cost labor pool of programmers.
The media have focused overwhelmingly on developing countries with low-cost labor, most particularly on India. Indeed, India remains the most attractive offshoring destination for three primary reasons: a large pool of well-educated IT workers, low labor costs and a large English-speaking population. However, it's easy to overlook locations that may, for a variety of reasons, be a better choice than India. Companies also must weigh time-zone differences, physical infrastructure of the country, government regulations, political stability and cultural compatibility. For example, consider the implications of offshoring in Canada, a country that may offer an attractive nearshoring option.
Robbie Nakatsu is assistant professor of finance and computer information systems in the College of Business Administration at Loyola Marymount University in Los Angeles.

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