So long, "offshoring." We hardly knew you.
According to a survey just out from consulting firm DiamondCluster International (NASDAQ:DTPI), several trends have begun to gain strength, merge, and push back at that famous 2004 election-year bugaboo: offshore outsourcing, or "offshoring." Collecting the results of interviews with more than 450 tech and outsourcing company executives, DiamondCluster's 2005 global IT outsourcing study arrives at some startling suggestions on where the offshoring trend may be heading.
For example, 51% of the executives reported recently terminating an outsourcing relationship. That's partly a result of last year's political climate and partly a response to angry U.S. employees who, unhappy at the prospect of losing their own jobs, are giving their management teams an earful. It's also a response to customer complaints about not being able to understand tech-support personnel from other countries.
But the decline in offshoring is also almost certainly linked to companies' growing unhappiness with their outsourcing partners. Firms reporting "satisfaction" with their partners declined from 79% to 62% over the past year. And for that drop, you have to place a lot of blame on the hype. Offshore promoters have been touting promises of incredible savings from outsourcing -- 50%, 60%, even 80%. (It's a wonder we haven't seen a promise of "110% savings" yet.)
But as it turns out, those savings are proving hard to come by. For one thing, no matter how low the prevailing wage might be in a foreign country, the distance-from-home factor adds its own costs. For example, when GM (NYSE:GM) builds a car in Korea, however cheaply it might build the car, there's still a cost to ship it back stateside for sale. When Reuters (NASDAQ:RTRSY) hires an Indian writer to type up 200 words on the latest eBay (NASDAQ:EBAY) earnings report, it has to pay a native English-speaking editor, living in London or New York, to check the Bangalore-based writer's grammar.
What's more, simple economics dictates that the cost savings, even if they were as real as promised, could not last. It's the law of supply and demand, folks. When no one's hiring in Mumbai, you can find cheap, talented labor in abundance. After everybody, his brother, and his Aunt Polly start hiring Mumbai coders, though, guess what: There's competition for the best workers, and those workers start demanding higher wages.
Still, one report does not a trend unmake. But investors who hopped on the outsourcing bandwagon would be well advised to watch this story. The last thing you want is to buy into Infosys, Wipro, or Satyam Computer, only to find you've stepped on the first nail in offshoring's coffin.
Fearless of the flames, Foolish writers dauntlessly carry on the outsourcing debate in the following articles:
- Outsourcing Dons Pajamas
- GE to Sell "Outhouse"
- Outsourcing to the Heartland
- Thoughts on Offshoring and Outsourcing
Fool contributor Rich Smith owns no shares in any company mentioned above.
