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Is Outsourcing Slumping?

January 2nd, 2009

Despite articles to the contrary IT outsourcing  is not disappearing. There is some apprehension regarding regulatory winds causing a different view on tax or immigration and putting outsource relationships under uncontrollable change but that will settle down within the first couple of months of the year. The economic drivers for outsourcing still exist and they often drive policy in practice and are likely to continue to do so. The cost savings from outsourcing of simple business processes or calling centers are overwhelming because the activity can occur almost completely offshore.

The cost saving when outsourcing more expensive tasks such as software development to India or China are only 15 to 20% due to the larger onsite and integration management component. A saving of 15 to 20% is considerable for a major IT department and this lower percentage doesn’t mean that the savings are wiped out by potential currency or cost swings in India or China. The offshore proportion of overall development outsourcing cost is relatively small. The onsite teams and employee relationship management and interaction are all onsite costs in the buyer’s own currency. The offshore component of the cost has overwhelming economic advantages far in excess of the 15 to 20% of the overall cost of the operation. If offshore costs rise by even 20% then the overall benefit of offshoring only diminishes by a couple of percent. Significant to the vendor’s margins but not to the overall rational for the process.

The other advantages of the scale of the skilled staff pools offshore and ability to ramp up and down team sizes in a very dynamic market remain completely in favor of outsourcing. As a result most large corporations are likely to want to continue to want to have the majority of their IT development staff in outsource arrangements. The BPO and KPO areas are going to account for higher growth rates and will also result over time in the complete outsourcing of the related IT support.

The significant barriers remain political but politics inevitably eventually follow the economic drivers. We will just need to see if there will be any barriers put in place.

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