Many people in the IT industry have seen the rapid growth of outsourcing as a threat. Reactions cover a wide gamut of feelings but for IT professionals whose roles are subject to outsourcing, fear and anger seem to be the prevailing sentiments; fear of job loss and anger at companies/management for outsourcing. Emotion aside, the viability of the outsourcing business model is typically analyzed from a cost savings perspective. The cost analysis has matured since the arrival of outsourcing and now takes into account many of the “hidden” factors which eroded or eliminated the value of outsourcing. Still, with maturity does not come ease; outsourcing is not something you dabble in and requires a well crafted, long-term strategy to realize savings. Ok, I’m a little off track.
From an economic standpoint, there is a strong argument for outsourcing. A couple of excerpts from Daniel W. Drezner’s article “The Outsourcing Bogeyman” provide compelling evidence in support of the economic benefits:
Catherine Mann of the Institute for International Economics conservatively estimates that the globalization of IT production has boosted U.S. GDP by $230 billion over the past seven years; the globalization of IT services should lead to a similar increase. As the price of IT services declines, sectors that have yet to exploit them to their fullest — such as construction and health care — will begin to do so, thus lowering their cost of production and improving the quality of their output.
McKinsey Global Institute has estimated that for every dollar spent on outsourcing to India, the United States reaps between $1.12 and $1.14 in benefits. Thanks to outsourcing, U.S. firms save money and become more profitable, benefiting shareholders and increasing returns on investment. Foreign facilities boost demand for U.S. products, such as computers and telecommunications equipment, necessary for their outsourced function. And U.S. labor can be reallocated to more competitive, better-paying jobs; for example, although 70,000 computer programmers lost their jobs between 1999 and 2003, more than 115,000 computer software engineers found higher-paying jobs during that same period. Outsourcing thus enhances the competitiveness of the U.S. service sector (which accounts for 30 percent of the total value of U.S. exports). Contrary to the belief that the United States is importing massive amounts of services from low-wage countries, in 2002 it ran a $64.8 billion surplus in services.
My understanding of the benefits of outsourcing has improved but I am still concerned that the impact is not without ill effects. What ill effects? I’ll leave that discussion for another time but for now I’ll just say that the impact of globalization and the increasing pace with which we need to adapt to globalization (e.g. outsourcing) may not be best for a balanced society.
Is there an alternative to outsourcing that can yield cost savings while supporting regional economic development? Possibly, and its called rural sourcing. Rural sourcing is defined as follows:
“Sending work to service providers in domestic locations where salaries and operating expenses are lower (such as the Midwest for the United States). An alternative for companies that want to avoid the negative aspects of offshoring.”
Ever since I heard about rural sourcing I have been enticed by the business model. On the surface, the cost savings may not appear competitive when contrasted to outsourcing, but when all the “hidden” outsourcing costs are factored in, rural sourcing may provide a serious offering. Will rural sourcing stop outsourcing? No. Can rural sourcing help revitalize regional areas that are in need of an economic boost? Can rural sourcing help retain high-skilled workers while allowing companies to save on labor costs? Yes, according to a rural sourcing company called, not surprisingly, Rural Sourcing Inc. Rural Sourcing claims to offer “…low-cost, high quality information technology services at 30%-50% cost saving while supporting Regional Economic Development“.