Myth: All Outsourcing Is Offshoring

The mention of outsourcing at any industry forum or in the media automatically conjures visions of Indians or Chinese working for international clients on their computers 8,000 or 10,000 miles away. As a technologist who has seen outsourcing from both the vendor's side and the sourcing organization's end, this tendency to confuse offshoring with outsourcing is extremely intriguing.

Let us begin with the definition of outsourcing. defines outsourcing as "The procuring of services or products, such as the parts used in manufacturing a motor vehicle, from an outside supplier or manufacturer in order to cut costs." The practice of "procuring services"' was adopted by IT executives and managers as far back as two or three decades ago when they began supplementing their IT staffs with contractors and consultants, a trend that also led to outsourcing units of work. Systems integrators, including large players such as IBM, Electronic Data Systems and Accenture, virtually created a market for outsourcing by taking over data centers and IT functions at organizations. During that time, academic researchers and strategists began to focus on the details of managing large-scale outsourcing, including best practices and strategies. Nowhere was there a mention of "foreign," "overseas" or "offshore." There was nonetheless a lot of debate on the loss of local jobs due to consolidation, improving efficiencies and lowering costs.

Systems integration vendors began touting economies of scale in their pitches for data-center consolidation and promised improved productivity (read "lowered staffing costs"). Closing of data centers employing 1,000 people in, say, Kansas City, and consolidating work at larger data centers in Dallas or Poughkeepsie, N.Y., made news only in local communities and perhaps figured in a footnote in an annual report. Even that far back, in the '90s, the outsourcing trend was hot. Organizations from Fortune 500 companies to midsize firms and even state, federal and local governments went on a vendor-contracting spree to address the twin challenges of Y2k and the e-commerce "revolution."

This was also the time when the industry lobbied the U.S. federal government to increase the number of H-1B visas, to ensure that an inflow of qualified foreign workers could supplement the shortage of local skills. (For the record, the author benefited from the H-1B visa program, having moved to the U.S. from India after a stint in England.) The debate in the media at that point shifted from outsourcing toward the entry of foreign workers and the H-1B visa program. Interestingly, this debate, along with a tightening of immigration rules, gave a fillip to offshore outsourcing (a.k.a. offshoring). Organizations, including large systems integrators, figured that if they couldn't easily get people to come and work in the U.S., some of the work they were outsourcing could be offshored.

Offshoring, which is a small, albeit significant, subset of outsourcing, became the focus of debate on the merits of outsourcing. The term offshoring also began to be used interchangeably with outsourcing. Most people, even those in the industry, mistakenly began to believe that all outsourced work is offshored, fueling acrimonious debate over the merits of sending jobs overseas. Given this background, one shouldn't be surprised that a search on Google for "debate on outsourcing" brings up a lot of articles that are debating offshoring, and not really the more general practice of outsourcing. The question remains: Where has the real debate on outsourcing gone? Have the industry leaders accepted the merits of outsourcing and are now concerned only about the merits (or pitfalls) of offshoring?

Mohan Babu is a technologist and author of a recent book, Offshoring IT Services: A Framework for Managing Outsourced Projects (McGraw-Hill, India). Although the author is a senior manager at a large systems integration organization, the views expressed in this article are his personally. Contact him at

Copyright © 2005 IDG Communications, Inc.

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