Low costs let the offshore outsourcing genie out of the bottle

I caught a segment on “60 Minutes” the other week that really opened my eyes.  The segment, titled “Out of India,” was about the growing trend for American companies to outsource various services to companies in places like India and China.  You’ve probably read about this trend as “offshore outsourcing,” and it’s usually in the context of customer service, technical support or software programming.  Until I watched this show, I didn’t give much thought to how deeply the practice of offshore outsourcing is going to affect American business and consumers, now and in the future.

Like you, I’ve been reading the news stories about various U.S. companies setting up software development shops or call centers in India and other low-wage countries.  Perhaps your own company has even explored outsourcing some aspect of customer service to an offshore agency.  The cost savings can be enormous – sometimes as much as 50%.  Figures like these are very compelling to American companies that are looking for every way to become more competitive in a global economy.

Thanks to the information technology revolution of the past two decades, geography has become irrelevant when it comes to performing many white collar jobs.  You don’t need to sit in Silicon Valley to write code.  You don’t need to be in the American Heartland to answer a technical question over the phone.  You don’t have to be anywhere near U.S. soil to process an American citizen’s federal income tax return.  All you need is a computer and a good telecommunications system, and you can work from anywhere.

Employers are waking up to that fact, as well as to the eye-popping report that offshore workers will work for wages that are one-tenth that of typical U.S. wages.  In India, a call center employee can earn $3,000 to $5,000 annually, in a nation where per capita income is closer to $500.  This means that workers are clamoring to take the call center jobs, unlike in the U.S. where such jobs usually have high turnover. 

To entice more companies to set up shop in India, private investors have built a solid infrastructure to ensure high availability of services.  For example, private companies have built generation plants to supply energy to call center complexes the size of multiple football fields.  They put in massive satellite communication systems to ensure that the phone will always work.  What’s more, the “people pipeline” ensures highly educated workers will always be ready to take the jobs.  India churns out more than a million college graduates a year, many of whom speak English fluently and are ready to service consumers all around the globe.

The offshore outsourcing trend is in the infancy stage right now, but it’s guaranteed to grow; the economics are just too compelling to ignore.  Forrester Research says that 40% of the Fortune 1000 firms have jumped on the bandwagon, and another 25% are in the experimentation phase. 

But those experiments don’t always work.  British firm Shop Direct recently announced it is bringing back in-house 250 jobs that had been outsourced to an Indian call center.  Labor unions and outsourcing experts in Britain speculate that the move is a result of customer complaints over Indian accents being hard to understand.  A Shop Direct spokesman said the outsourcing contract had been “only a trial, and we have decided to wind up the overseas operation following peak Christmas trading activity.”  Similarly, Dell brought back some overseas technical support jobs because major corporate customers complained about the quality of support.

As the offshore outsourcing trend grows, IT jobs such as phone-based technical support, software development, and applications testing are particularly vulnerable.  Analysts predict that upwards of 2 million IT-related jobs – perhaps even yours – will move offshore within the next decade.

We’ll be reading a lot more about the offshoring of IT jobs in the coming years.  After years of increasing globalization and free trade, significant improvements in IT and communication infrastructures, and tremendous pressure for companies to cut cots, this genie is out of the bottle for good.

Linda Musthaler is vice president of Currid & Company.  You can write to her at mailto:Linda.Musthaler@currid.com