CFOs Say Offshore Outsourcing to Decline

This has been in motion for over a year now. Contract cancellations and vendor replacements can take several months & Indian suppliers have attempted to dismiss the lost US/UK business by replacing it with domestic Indian business. However, the impact is now making the news here.

Convincing stats first appeared in early 2008 that we bought into - American executives participating in the "Black Book of outsourcing" user survey announced the growing shift of their intentions to move more work back onshore. They qualified their reasons and we found ourselves in agreement as a company with our US peers.

By this summer our Fortune 1000 will have actually moved all our major BPO & IT processes back to US suppliers from India with no plans to return with any large projects. The US vendors are discounting competively to India and we're employing Americans to recovery.

WSJ wrote a story on the trend last June
http://online.wsj.com/article/SB118159871575631717.html

The new trend among companies is to hire Indian CFO's. They do this because they will act like racist Indian managers who only hire their own. The H-1B is used to replace White Collar American workers with cheap labor from third world countries. The Democrats love it because it increases "Diversity" and the Republicans love it because Corporations get "Cheap Labor". That's why so many Democrats and Republicans also want "Amnesty" for Illegal Immigrants. But, what makes the H-1B so insidious is that combined with the 1965 Hart-Celler Immigration Act it one person here on an H-1B Visa can bring their whole family (wife/husband, kids, brothers, sisters, uncles, cousins, parents, grand-parents, etc) because of the "Family Unification" part of the 1965 Hart-Celler Immigration Act. Of course, the 1965 Hart-Celler Immigration Act all but bans immigration to the U.S. from Europe and only allows immigration to the U.S. from Asia, Africa, South America, and the Caribbean. That's why you see very few immigrants from Ireland, England, Germany, France, Italy, etc. anymore to the U.S. Many people in the 1960's like Ted Kennedy thought we were being racist by allowing so many people from Ireland to immigrate to the U.S. and so few people from Asia, South Africa, and Africa to immigrate here. But, since 1970 U.S. Real Wages have been stagnant, crime has gone up, our culture has coarsened, our prisons are run by gangs and stretched to their limits, community hospitals continue to have to close because of unpaid bills, and many parts of America are controlled by Gangs (50,000 Illegal Immigrant El Salvadoran Gang Members live in Los Angeles alone). The U.S. needs to end the H-1B program, repeal the 1965 Hart-Celler Immigration Act, and deport all illegal immigrants or we will become a low-wage, high-crime, Balkanized nation.

What the administration needs to do is give some incentive for US manufacturing companies to bring production back to the US. Wouldn't you think that people in the MW, especially Ohio and Michigan, would jump at the chance considering how hard they have been affected by the economy?

I understand why BDO Seidman ended up with the survey results they did but I disagree with their analysis. BDO asked CFOs about their outsourcing plans during January, a terrible month for businesses, when everyone was paralyzed with fear and unwilling to even consider future investments. To make the leap in logic that these companies will reverse their outsourcing initiatives longer term is not warranted. Not outsourcing is an untenable long-term situation. Companies that don't globalize will find themselves at a significant competitive disadvantage. As a result, the paralysis that BDO presents as a longer-term trend is unlikely.

Instead, companies will get smarter about their outsourcing:

* India's outsourcing preeminence will decline as infrastructure cracks and recent developments (e.g., the Satyam scandal, Mumbai attacks) dent the country's image. In a volatile world, companies can't afford to take the risks that India has begun to represent.

* Other regions and countries have been developing/maturing their own outsourcing industries and sectors and are providing a means to diversify outsourcing initiatives. We can see that in BDO's report since Latin America, Canada and other regions not mentioned as current outsourcing locations have emerged as significant new frontiers.

Basically, companies will be talking more authentically about a global outsourcing strategy where they focus on securing specific services and capabilities from a variety of locations. The primary new variable will be that political and economic stability will play more of a role (this was a primary concern of BDO's survey respondents). Cost will still be a key driver but in a volatile global economic environment, cost reduction without stability and sustainability won't work.

I stopped hiring SE Asian freelance programmers last year because of poor work habits. I fired six and gave up on them. I do much better with North American and European freelancers in several fields and I have zip budget as a self-funded startup entrepreneur.

I'm sure there are high quality SE Asian workers but I couldn't find them. I couldn't keep exploring forever. I understand that other small operations have experienced the same issue.

Now that it has been a little more than a decade since the explosion in "offshoring" IT started, most IT managers have realized that the model is not nearly as cost efficient as once believed.

The obvious issues related to increased start up time, management overhead, and communication are only part of the challenges.

There are also major challenges with the model that drive the cost of offshoring higher, but are often overlooked when performing the analysis. Examples: staff turnover, currency fluctuations, and quality control, and protecting of intellectual capital.

When exposure to political risks (e.g terrorism) and company viability risks (Satyam) are added to the mix, it is natural that companies will want to think twice about offshoring.

That being said, I think companies that are accustomed to managing networks of vendors and manage risk through intelligent partnerships will continue to exploit the talent pool in other countries that the US does not currently have.

Buy the best! Source where you best can do it! Companies need to get smarter about outsourcing. Everybody needs to get smarter about outsourcing. At the end of the day, there is a job which needs to get done. It should get done the best possible way for any company. Source only to America is as limited as having only India on the map for outsourcing.

India just starts sharing attention with all the other nations and locations on the world. I believe there is the perfect place for every job to get done. I wouldn't fly to India to get my hair cut - but I might still consider to talk with some indian service provider if I need some data entry...
What America really needs to learn is to look at America! America isn't just the USA, with the growing hispanic population we should figure out ways on how to source from countries like Guatemala - who are close by and in our central time zone...
BTW - this whole trend: Ohmae already explained everything happening now in his Triade Modell 1985!

Thanks for all the great comments. "Buy American", it sounds like you recognized this trend early. You credit the Black Book of Outsourcing. My colleague Steve Hamm wrote about how some people have been critical of the Black Book of Outsourcing last July:

http://www.businessweek.com/magazine/content/08_28/b4092084064809.htm?chan=top+news_top+news+index_news+%2B+analysis

He then followed it up with a blog post called "Strange Things About that Black Book" that even mentions me (scroll about halfway down):

http://www.businessweek.com/globalbiz/blog/globespotting/archives/2008/07/strange_things.html?campaign_id=rss_blog_bangaloretigers

Ryan, It sounds like a good idea to give manufacturers incentive to bring back work to the U.S. but what would the magnitude of that incentive need to be? And once that incentive stopped, wouldn't manufacturers simply head across the border once again?

Outsourcing experts say that once we see an uptick in outsourcing, it will likely be an early sign that the economy is about to recover. It seems counterintuitive, maybe, but companies that are starting to grow again will be reluctant to hire here because they'll be trying to keep costs low.

The author is livin in a fantasy world if he thinks that outsourcing can stop...India will continue to lead outsourcing for many years to come. Its not just the cost advantage, its the fact that companies have a huge talent pool to choose from. One american has to compete against 3000 highly skilled indians or chinese. And if u consider the wage factor then that is a bonus. People are missing the point though i believe. And so is ur new president..America is forgetting to get the basics right. It has to get back to competing. And how do u compete with the billions of indians and chinese?? Certainly not by closing up ur economy! That would mean u r running away from the problem. America needs to revive that great american spirit of the 1800s...compete in this global world. And to be able to effectively compete, obama admin needs to take things onto a war footing...pump huge amounts of money into education, research, infrastructure and creation of jobs. And if anything increase immigration of highly skilled indians and chinese, cos after all these people will bring in skills, money and therefore, more jobs for everyone. I am afraid though that ur new govt, does not have a grasp on these basic fundamental problems and the future is indeed bleak for ur country....

We got the impression that Steve Hamm's Black Book story last year was transparent sensationalism set-up to discourage a small US polling business from reporting the declining customer confidence in the billion dollar Indian outsourcers that Steve openly adores: Wipro, Infosys and IBM.

Seems like, from your story, he did not achieve his goals. Wipro has taken the biggest hit of all.

I am a software entrepreneur that has founded and built two companies. I have outsourced part of the product development to US and Indian based companies/operations. Here is what I have learnt and how I look at this issue:

1. If you want to come up with new innovative designs - the US mindset and environment is unbeatable. Immigrant workers (Europeans/Latin Americans and Asians) working with US employees also seem to be much much more effective in coming up with new ideas in the US! Thus I do all product design, specifications and final QA in the US. Short projects are typically completed in the US (less then 5 months).

2. I rarely give work to US based consulting companies (using US teams) since they are expensive and do not deliver great results in my experience (5+ projects) - I will only do so for non-core short term (less then 6 month work).

3. Using Indian outsourcing firms (I have used 2 of the big 5) for core ideas can be problematic, since they have a high turnover of staff and tend to put a lot of "freshers" (inexperienced workers) on your project. This can be avoided, but you must have constant presence India to avoid this. They are however excellent at non-innovative product development or integration/migration that requires a lot of people (a new billing system for example). The larger the project the better they are. I will only look at this option for projects over 1 year, requiring over 20 people.

4. IMHO, and the strategy I use is to build an operational base in India where we conduct the actual product development, initial QA (final is done in the US) and certain types of customer support. With competent local managers, I have seen amazing product quality and delivery. Hiring the team in India can however, be initially very hard, but can be overcome by partnering.

In the final analysis I am concerned about creating innovative high quality products, at the lowest price in the fastest time period. If I did it all in the US my costs would be too high and it would take too long. If I did it all in India, the product would not be innovative enough and again due to innovation issues, it would not be developed fast enough.

The right answer is that businesses must understand what you can source from where (e.g. Apple designs its product in the US, but builds them overseas) and arbitrage, maximizing profits which generally allows them to grow their business profitably everywhere - isn't that the point?

read this and call ur senator NEW rules before bailing these guys out!!
Why should American Tax Payers bail them out! Pl. help American IT employees. Pl ban H1Bs and L1s into this country!!
Pl see this link,
http://economictimes.indiatimes.com/articleshow/4242704.cms

Bringing manufacturing back "on-shore" is a great idea however, with the imminent passage of EFCA followed by the projected onslaught of unionization, the labor costs of US domestic manufacturing will increase by 30%.

IT outsourcing maybe, but general manufacturing.. Not now.

Ahh, the great debate. I have see both sides of the spectrum for manufacturing and IT. I have been in IT for over 10 years now and the same thing that happened in manufacturing is happening in IT.

If you look at the American infrastructure over the past say 40 years, manufacturing was the first area to go offshore. When all this started economic bust and boom with cheaper products and communication expansion. Then it was more and more white collar, accounting, call centers, etc - bust boom with the further need for automation. Now IT, but it was more like boom bust. I don't care how you cut it, if you take all of the jobs that fuel the financial backbone of the world and is responsible for the need for those products and services that everyone is trying to make an extra nickel per share on, where does that leave the "global" economy? The only thing left we can offshore is the exective realm, now that's a real cost cutter.

Realistically, moving jobs and effectively moving the money that that job puts into the regional economy into another regional economy affects that entire regional economy.

Everybody has a solution so here is mine: Move manufacturing jobs back to the US, no unionization allowed, we see how well that worked in the auto industry and in reality just because you stay with a company for 35 years doensn't entitle you to a good wage, land of the free, you are free to enhance your skills and grow with the company. If you started on the production line and your still on the production line 35 years later, why would you get anything different from the person who has been there for 1, 5 or 10 years doing the same thing? Should you get a raise, I don't know, maybe in line with inflation and do you deserve it?

I love the IT side of it, so many projects I have seen where the reduction in what I call "paper labor costs", costs that are only on paper, "one of dem der programmers is x amount here, y amount der, dats a gooder deal", right. Consider all of the costs to the project and stop looking at the paper costs, and go google "group economics".

All of these come down to cost, the ONLY reason for offshoring or importing (H1-Bs) is cost, the next quarterly, raising stock prices by a nickel, but if you don't have anyone to buy the products and services you are trying to shave costs, where does that put everyone?

"All of these come down to cost, the ONLY reason for offshoring or importing (H1-Bs) is cost, the next quarterly, raising stock prices by a nickel, but if you don't have anyone to buy the products and services you are trying to shave costs, where does that put everyone?"

This is where the "tragedy of the commons" comes into play. What is good for each individual becomes bad for everyone collectively. If everybody abuses the common resources, then everybody loses in the end -- imagine overgrazing a common sheep pasture or overfishing a public lake. But why should *I* care about that? If *I* abuse the common resources, then *I* win, especially if other people don't, or if I beat them to it, or if I abuse more aggressively than they do.

If everybody outsources, then everybody indeed loses in the end, exactly as you have said. So maybe *I* should outsource first and fastest and grab what I can before everybody starts doing the same and the whole house of cards crashes. Sort of like a Ponzi scheme, actually.