For the past decade it has been a widely held belief among IT executives that utilizing supposedly lower-cost resources from non-U.S. locations was the best way to maximize their ever shrinking budgets. Since Y2K, in fact, there has been a virtual torrent of IT jobs flowing out of the U.S. to overseas locations, most notably India and China. While the numbers vary, it’s estimated that nearly one million formerly U.S. IT jobs have moved or will soon move over seas, with an estimated 3.3 million service sector jobs at risk by 2015.
The primary drivers were initially twofold, cost and resource availability. Back in the early 2000s, for example, you could hire an India-based IT contractor for under $20/hr., compared to $100/hr. or more in the U.S. There was also a severe resource shortage in the U.S. because of the boom in demand driven by Y2K, the .com bubble, and the broad adoption of Enterprise Resource Planning (ERP) packages. India, and eventually other markets, seemed to be the answer to both issues. Over time as the U.S. and global economy stalled, the immense pressure on IT organizations to do more with less also played a significant role and accelerated the move to offshore IT functions.
Over time, offshoring had become a way of life for U.S. IT organizations. Given the seemingly attractive price point as measured in $/hr., many CIOs are forced to utilize a predefined percentage of offshore services as part of their IT delivery portfolio, in effect forcing the escalation of offshoring of U.S. jobs.
But, times are changing. Challenges have arisen, many not expected, and are now causing people to rethink the offshoring trend that has dominated the IT landscape for the past decade.
There is a growing body of evidence that suggests the actual cost of offshoring is significantly higher than a simple comparison of dollars per hour. Challenges with software and testing quality, required rework creating inefficiency in the software development process, additional effort because of time zone challenges, language and other communication issues, high turnover (up to 40% annually in some cases) in offshore locations, intellectual property and security risks (especially in unregulated countries like China), are just some of the unanticipated issues that have plagued offshore development. None of these issues show any sign of abating.
Enter “onshoring”: an emerging alternative with tremendous appeal. It has several names, including onshoring, rural sourcing, home sourcing and insourcing. The concept is to bring work back to locations in the continental U.S. and take advantage of the highly efficient, effective and innovative U.S. workforce to perform IT functions that have been offshored over the past decade. This idea, and now trend, is being fueled by all of the shortcomings listed above.
Two challenges in particular seem to be really driving the movement: the rapidly rising cost and poor quality output of offshore services. Recent data suggests that the cost of offshore services in India and China are rising by as much as 25 percent per year and are expected to continue for the foreseeable future. That is compared to a one to two percent per year rise in the U.S. The tremendous cost advantage that offshore locations once enjoyed is quickly vanishing. Some projections predict that the cost of offshore and onshore resources will equalize around 2015 on a dollars per hour basis for some locations in the U.S. This does not take into account the true cost of offshoring with all of its challenges.
If we take into consideration the challenges of offshore and the benefits of onshore, it begins to make tremendous sense to focus on developing a U.S. based workforce with an IT skillset. Bringing this work back into a domestic model has its own challenges. The first challenge is finding the right location. Like any other business, IT services businesses must have the right climate and combination of factors to flourish.
First, there must be an available workforce. This means some amount of IT skill in the area, along with a strong population with the right aptitude and attitude to thrive in a career in technology. It does not need to be a major metropolitan area, but rather simply an area large enough to support the desired business scale.
Second, it must be a low-cost marketplace. Traditional areas that are a hotbed for technology jobs have become very expensive to live in, therefore the wages required are higher in those areas. Thirdly, there must be a strong, responsive and collaborative educational system. There has been a tremendous drop off in IT graduates over the last 10 years, in some areas 10 fold. To regenerate the population of young technologists the school systems will need to be able to respond to the demand and work with businesses to reshape their technology programs. It is only by combining the factors of available resources, low cost, and educational infrastructure that an onshore initiative can be successful.
The U.S. has by far the best and most productive workforce in the world. Cost factors drove companies offshore to find cheaper labor at the expense of efficiency and quality. In the past these tradeoffs seemed necessary to advance as a business. Now, however, the U.S. is reemerging as one of the preferred locations for IT services providing a powerful combination of quality, affordability, and consistency and again competing in a global economy.
John Williams is the Senior Vice President of Collaborative Consulting and recently helped launch an initiative in Wisconsin that would significantly reduce or eliminate the increasing challenges encountered in offshore service delivery by keeping jobs “onshore.” Collaborative is headquartered in Burlington, Massachusetts.