Offshoring Not Dead, but Is It on Life Support?

As the value of the U.S. dollar drops, the business case for offshoring software development and other IT work becomes far less compelling. We've blogged about this before, citing research that shows a significant decline in the value of U.S. currency vs. the currencies of popular offshore destinations such as India, the Philippines, Russia and Malaysia.

In a bit of economic irony, outsourcing business from U.S. companies fueled much of the growth in these countries. Faced with booming demand, IT workers in countries like India are commanding higher salaries, which (cue the irony) removes the labor-cost differential that made outsourcing so attractive to U.S. firms in the first place.

That's the point made by Andy Singleton, president of software development firm Assembla, writing in the company blog. Though Singleton may be rushing things a bit by calling this kind of labor arbitrage "inefficient and obsolete" and by deeming offshoring "dead," his basic premise is solid.

Indeed, as we blogged recently, some companies are finding it just about as cost-effective to hire IT workers in small-town America as in India.

Shifts in economic fortunes will make it necessary for companies to focus more on quality and less on simple cost reduction, Singleton writes.

The global economic boom is grinding down the simple offshoring opportunity -- to buy things cheaply. The opportunity that it churns out is more sophisticated -- to sell goods and services on a global scale.

CIO Insight cites an interview with Singleton in which he says U.S. IT pros can "breathe a sigh of relief" now that the gap between their wages and those of folks in other countries is narrowing. Not so fast, several experts tell CIO Insight. Their consensus is that low-level IT work will continue to be offshored, while higher-value tasks and client-facing positions are more likely to remain in the United States.

Peter Schay, the president of the Advisory Council, makes a similar point in an IT Business Edge interview from earlier this year, CIOs Must Stay in the Loop or Risk Hanging Themselves. He says:

... What is a rising expectation that when you outsource, it's really going to solve the business problem that gets defined for it. CIOs have to be much more sophisticated about how they manage outsourced projects. They have to focus on delivering results from outsourcing rather than just on spending less.