New Outsourcing-Onshoring

June 26, 2011

Due to the continuation of sluggish US economy, US companies are finding ways to use low-cost regions within the US for their IT work. Though offshore outsourcing is pervasive to find cheap but good IT labor, there are regions within US which have good IT skilled people that are willing to work for less salary compared to people in bigger cities. US companies are tapping these skilled IT workforce and onshoring their IT work. Recently Harvard Business Review published a report that specifies several US companies are started building IT centers within US and hiring IT workers.

Following are some of the reasons this trend will accelerate in the coming years:
Salaries for IT workers are increasing in India on a regular basis. According to NAASOM, the attrition rate for IT employees is between 12%-17%-for BPO workers, it goes as high as 55%. The main reason for IT workers leaving a firm is for a higher salary which increases by 15% year by year. Still, it’s cheaper for companies to add bodies in India than in the US. But very soon the cost arbitration will reduce-and for US companies, it will be easy to outsource to onshore locations within the US.

Many cities in US are offering tax incentives for companies to open IT, manufacturing, or any type of company in their cities to spur job growth. This will make US companies want to open offices within US cities.

Many IT jobs in health-care, defense, and financial industries require sensitive data that cannot be outsourced to offshore locations. Research shows that 15% of all IT related jobs are in this category. Specifically, the growing health care industry will increase domestic outsourcing within various US cities.

Start-up companies like Systems In Motion and Cross USA are offering alternatives to offshore outsourcing models with their own rural outsourcing models by opening offices within US cities. But these companies are way too small to compete with larger Indian outsource giants like TCS, Infosys, Wipro, etc. But with the right business strategy these companies can compete and may steal some market share from Indian outsource companies.

Following are two major industry trends happening in the IT industry:
Using open source software has been getting wider attention with big corporate CIOs and they have started using it in their business critical applications.

Companies have started using both public and private clouds for their infrastructure needs, and the market for cloud computing will hit $150 billion by 2014.

Both of the above trends will make companies become nimble in their outsourcing strategies. They will make their IT more adaptive and agile by using open source and cloud computing to test their ideas, market trends, and strategies. They will push to use onshore cities with cheaper skills than offshore outsourcing. Also, companies want to keep their cloud facilities within the US border and will choose rural cities to build their data centers, which will boost rural sourcing.

All the above trends cannot stop offshore outsourcing to countries like India, China, etc. But, these trends will definitely  increase the onshore market share in the coming years. Also, the next US presidential election in 2012 will create lot of anti- offshoring sentiments and may increase onshoring-at least in the short-term.


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