President Obama’s Call To Action: A Serious Boost For Domestic Outsourcing . . .

Forrester clients are looking for more options when it comes to IT service and outsourcing providers, and there’s a new option available to them: domestic outsourcing.

For many years, India has been the answer for large companies that need to save money and increase their IT bandwidth. Indian vendors, in fact, revolutionized the IT services industry by delivering higher quality, lower cost services with a never-let-the-client-down mentality. Now, however, the market has “overcorrected” in terms of outsourcing IT work. Companies, whether they work with a pureplay Indian vendor such as Infosys or a US-based vendor such as IBM, have to buy the bulk of their programming talent from India.

Unfortunately, today, India is not the best delivery location for all IT work or for all companies.

First of all, India is overworked — some might even say tapped out. The excess demand for Indian labor has meant that clients are less satisfied with their offshore IT services:

  • Costs are escalating and narrowing the gap relative to US costs.
  • Employee turnover is too high.
  • Time-to-market is impacted by rework and time zone issues.
  • C-Player and “fresher” syndrome reduce quality and productivity further.
  • It is increasingly difficult to land offshore resources onsite using H1B and other visas.
  • Communications challenges persist and are exacerbated by the increasing use of Agile methods.

Second, the role of technology in business is changing. To build technology solutions that drive the business, as opposed to just enable the business, technologists need to have more contextual understanding — so they understand, intuitively in some cases, what the business wants without the business having to specify it. That contextual understanding is very hard to get from a non-native. This means that clients spend tons of time trying to specify their needs so a non-native developer can interpret and build to suit those needs. As agility becomes increasingly important, this approach does not suffice.

Given all this, I was thrilled to be invited to the White House on  January 11th to attend a summit on President Obama’s “Insourcing American Jobs” initiative — what, in my IT services and outsourcing world, I would have called a domestic outsourcing summit. You can read about the summit here [http://www.whitehouse.gov/the-press-office/2012/01/11/president-obama-issues-call-action-invest-america-white-house-insourcing]. I believe domestic IT outsourcing is a rising trend that has the potential to re-shape the way companies consider IT outsourcing. Domestic outsourcing is just what is implied by the name — the use of US-based resources to perform your IT services needs. The domestic outsourcing model transplants the offshore factory model to the US and uses local, contextually sensitive developers on the software assembly line so that clients do not have to spend so much time and money specifying their requirements in a way that can be interpreted by non-native programmers.

There are three reasons why this trend will be important to American businesses:

  1. Business alignment. Unfortunately, when you look at the offshore factory model, what you find is an almost exclusive focus on the build portion of the software development life cycle. The front end of the life cycle (gathering business requirements and doing analysis) is really left up to the client. As all who have been doing offshore outsourcing know, this process is very expensive and, of course, very time-consuming, and it eliminates the ability for IT to innovate on the behalf of the business.
  2. Time-to-market improvements. Sure, the labor rate is higher, but the total cost of ownership seems to actually be lower — if we can believe all the anecdotal evidence facing us. Having access to cost-effective, high-quality IT professionals in real time will change the speed at which companies can respond to and drive demand.
  3. Political support. Politicians are rallying around domestic outsourcing. Currently, the federal government does not support the IT industry in the US the way the Indian government subsidizes the IT industry in India with things like tax-free export zones. So, Indian vendors have a much lower cost structure, not just because labor is less expensive, but also because they do not have any tax overhead. This means it’s difficult for domestic IT outsourcers to compete with government-subsidized Indian vendors on an even playing field. The Obama administration’s answer, in addition to new federal tax incentives and disincentives and Small Business Administration loan guarantees, seems to be the newly formed SelectUSA program. This program is meant to help companies take advantage of existing federal programs and tax breaks (e.g., the R&D tax credit) as well as state and local subsidies (e.g., the state of Texas’ Texas Enterprise Fund, which gave CGI $1.8 million in subsidies to open a software factory in Belton, TX) in a one-stop-shopping kind of way. Previously, navigating federal tax laws and state and local incentive programs was close to impossible for all but the most persistent entrepreneur. By no means will this program or anything the President promised equal the investments that the Indian government makes in its IT industry, but this visibility will increase this nascent industry’s momentum and speed up supply development and demand generation.

I must say, my unbiased analyst opinion is that IT jobs are coming back here and this transition will be at least as quick as the Indian software vendors’ rise to dominance. To be sure, India will still be part of the global outsourcing model — the big change is that the US will also be the dominant participant in this critical global industry.

Interested in this domestic outsourcing trend? Considering alternatives to India? Please leave a comment, and I’ll try to respond.

Comments

Great post!

Steph, glad to hear that you were a part of the "Insourcing Jobs Initiative". I'm curious to see what kind of policy meat gets put on these bones of desire! But I think your assessment of the trends is right on the money, and will only get more apparent over time.

Prof. Rafiq Dossani from Stanford University's Center for South Asian Studies is coming out with a book soon, based on his research into the various university systems around the world that supply labor and its impact on the availability of talent. I wouldn't want to steal any of his thunder, but his research is a great illustration of the of the C-player syndrome!

It will be very interesting to watch this trend as it accelerates.

Regards,
Debashish

Could not agree more

Great observations and blog entry. I could not agree more with your perspective regarding the challenges facing both the India outsourcers ( I would add China outsourcers for a similar but slightly different set of reasons) as well as their clients.
Another key consideration which I think you implied, but wanted to make explicit, is the strain that working with offshore companies puts on internal employees in the way of off hours meetings and working sessions that are required to articulate requirements and resolve issues. This burden is very hard to measure, but as anyone who has worked in this model can attest to, is real and significant.
The new mantra of IT, which is as you put it "to build technology solutions that drive the business" cannot be satisfied by an organization that does not know the business. This requires a proximity and understanding that is difficult to obtain in the offshore model.
Great stuff.

Spot on, Stephanie. Well done.

Now what we have to do is convince Washington to develop and fund training programs to take the underutilized but under-trained work force and turn them into the business technology professionals we need to employ here at home.

This will solve the unemployment problem and return the investment to Washington in the form of a reduced outflow of dollars and increased tax revenues.

Great post Stephanie!

I have been working in IT staffing and project work for over 20 years for the last 12 years I am a co-founder of a small premium service provider in the IT space. In the past year we have moved into a model for local support of applications that are currently in production. Our differentiator is that we utilize local resources to do the work, interface with the client and get integrally involved with the clients business. Although our team is small the model is resonating with small to midsize IT organizations who are dedicated to supporting jobs in the community. We are additionally working with local University's in order to mentor students in Computer Science degree programs and then hire them to do the work. Our goal is to be the alternative to large outsourcing operations and maintain high customer service and technology standards.

Scarse

Bold prediction! Then it is true that talent is scarse, and that the world is flat but culture isn't.

domestic outsourcing

do you have statistics on the percentage of US companies balancing work locations (on and offshore)?

Outsourcing Governance Audits

Thanks so much for this post. There is very good and helpful information in this post. Keep up the good work.
Regards:
http://itunes.apple.com/us/app/globalsourcer/id488714097?mt=8 title=" Outsourcing Value Assurance "> Outsourcing Value Assurance

Always insightful and relevant

Good to see you publishing again!

Change is coming. Globalization is here to stay for sure. China is another alternative, I just came back from an eye opening week of how the government is supporting the industry there. Here in the US it's left to entrepreneurs with some level of government support. This fall "The Academy For Software Engineering" will open in my home town of New York. It marks a recognition of need for more of the high-tech skills in the US and focus on growing skills domestically as well as abroad. That coupled with business immersion provides expanded perspective for those students. I'd love to see Business Analysis as part of the curriculum, coupled with internships. It would be a killer combination.