Is IT Offshoring an Overhyped Myth?

Monday Dec 1st 2008 by James Maguire
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A new survey suggests that the extent of offshoring is greatly exaggerated. But the statistics are ambiguous.

(Comment on this article at the bottom of the page.)

About a year ago I attended an Interop IT trade show in New York City, and I was struck by the difference between the main show upstairs and the Outsource World show downstairs.

Upstairs was the classic tech trade show in all its gaudy glory: big flashy booths by brand name vendors, noisy constant-loop videos, middle-aged guys singing Karaoke, promotional giveaways, and copious booth babes (that’s not me being sexist, it’s an industry term; and no, I’m not sure what young women in hot pants have to do with routers and enterprise security).

Downstairs was Outsource World, and I almost missed it. The hall was almost completely quiet, excerpt for casual conversation. The booths were sober and spare, little video, no Karaoke. The giveaways were mostly company brochures. The sixty or so booths were IT outsourcers from everywhere: many from India, of course, but also Israel, Eastern Europe, South Africa, Ireland, Malaysia, Canada, Chile. Their pitch, though delivered modestly, was compelling: if you want to save money, let us know. We’re eager to please and we work cheap.

The difference between upstairs and downstairs left me feeling doubtful about the vendors upstairs. The price of technology tends to fall over time. Both hardware and software get ever cheaper. Are the expensively marketed vendors upstairs equipped to compete, long term, with the bargain-basement folks downstairs? When the booth babes have gone home, will a higher priced bid from New Jersey get chosen over a cheaper one from Bangalore?

I left the Interop conference in stronger agreement with a widely held opinion, that offshoring poses a huge challenge to domestic IT vendors, especially in software. I wish that weren’t true – I have a sentimental fondness for the US vendors (and I want my neighbors and colleagues to have jobs). But I’m afraid it is.

So I was happy to see the new IT Trends Survey from the Society for Information Management (SIM) that suggests – depending on how you read it – that offshoring is merely a minor factor in IT.

Jerry Luftman, the SIM VP of academic affairs and a professor at Stevens Institute of Technology, says the extent of offshoring is greatly exaggerated. Various parties have stoked fears of offshoring for their own purposes.

“It’s basically politicians run their campaigns on some of those fears. Certainly news people have grabbed on to that,” he tells me. “And unfortunately, parents hear that. K-12 advisors know that, and they’re veering their kids toward other majors.

“It’s gotten better in the last year or so, but a lot of schools have closed down.”

He points to the following chart from the SIM 2008 IT Trends Survey:

IT offshoring trends, SIM 2008 IT survey

As noted in the chart above, the budget allocated to internal staff (33.7%) and outsourced domestic staff (6.2%) far outweighs the allocation for offshoring (5.6%). The domestic budget looks like a full-grown tree next to offshoring’s little sapling.

Yet this chart from the SIM 2008 survey seems to paint a different picture:

IT offshoring trends, SIM 2008 IT survey

Even professor Luftman concedes the projected offshoring increase is noticeable.

“Clearly, the [offshoring] projection for next year is taking a larger bump than one might have expected,” he says. “Larger than what has appeared in previous years.”

Yes, I note, the projected jump in 2009 certainly shows a trend toward greater offshoring.

“It’s not a trend, it’s a one year projection, you can’t call it a trend yet,” he says. He points out that in the last few years offshoring has gone down.

But, I respond, ever pessimistic, if you look at the larger trend line from '05 to '09, fluctuations aside, the trend is clearly toward more overseas activity.

Not as professor Luftman sees it. “But it’s still relatively not a large number,” he says.

Continued: What drives offhoring?

So apparently we interpret the data differently, but we agree on one fact: IT offshoring is a highly controversial topic. Emotions run high on the topic, especially among workers whose livelihood is threatened by offshoring.

As if to invite more controversy, the professor states what he believes is one of the reasons for offshoring:

“There are not enough people with the appropriate skills in the [domestic] marketplace,” he says. “So to me, if you’re an IS executive and you have demand for resources and they don’t exist here, you’ve got to get it from someplace.”

His statement defines one side of the core disagreement. On one hand, I’ve heard numerous execs say they can’t find the talent here, and conversely, I’ve heard countless tech workers says this is just an excuse to undercut wages, that the talent is here, it’s just cheaper to hire it from India.

Luftman is well aware that IT workers don’t want to hear that sufficient talent can’t be found among US ranks.

“That’s controversial because you’re going to have people say, ‘Gee, I’ve been in IT for 10-15 years and I’ve been out of work for a year.’ And the answer is: ‘What have they done, what are the skills they offer?’ Those people might have very good technical skills, but those skills might not be the specific technical skills that a company is looking for.”

More and more, he says – in a view strongly correlated by tech hiring agents – IT department want workers who are well rounded. They want business and interpersonal skills.

“If you look at the skills that companies are looking for, for entry level positions as well as mid level positions, technical skills aren’t high on the list.” It’s as if technical skills are a given, and now, according to the SIM survey, employers want strong written and oral communication, critical thinking, creativity and innovation, project leadership, and good collaborative skills.

But this list of skills muddies the core argument about offshoring. The US customers who buy IT services from overseas aren’t looking for creative problem solving or good oral communication. They’re looking for the lowest possible price for competent work. Inarguably, US buyers are willing to put up with weak communication skills and cultural cluelessness to shave 25 percent off the price of a development job.

So the debate rages. The offshoring of IT is driven either by 1) the lack of talent in the US, or 2) profit-driven execs who are eager to look overseas to save money.

Or, depending on how you look at the SIM 2008 survey, perhaps offshoring is essentially insignificant, a fledging trend that’s too small to be concerned about.

What’s your view? Comment below.

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