Is Outsourcing, Insourcing if it is in America

Fighting a weakening dollar and ever increasing programming salaries overseas, outsource development firms have are having a harder time making ends meet so in order to combat timezone, communication and budget problem the firms are looking to the Americas for solutions. PC World has written a interesting article on the subject called Outsourcing Comes to the Americas:

Sometimes the grass is greener ... in your own backyard. That's the message delivered in the report "Time Zones Do Matter: Rediscovering the Americas and Nearshore Delivery" by Dana Stiffler, research director for AMR Research.

Read the Report For more on what this means for U.S.-based IT organizations, see a PDF version of the AMR Research report here.

By 2015, India will be just one hub in a vast network from which IT organizations will deliver technology and business skills, according to the report. "Most processes are better candidates for nearshore and remote domestic delivery than they are for 100 percent onsite or 100 percent offshore," says Stiffler.

In response to what Stiffler describes as "India and China fatigue," businesses are seeking relief from the staff attrition and rising salaries that have become the norm in Asia and looking to Latin America and less expensive regions of the U.S. as an increasingly attractive option for IT services delivery.

As the rupee has strengthened against an already weak dollar, Latin American currencies have gained little vis-`-vis the greenback, making that market even more attractive. Large service providers targeting the U.S. market have already expanded into Latin America, with the most popular destinations being Brazil, and more recently, Mexico. U.S. and Indian firms are also opening up new service centers in the Cono Sur countries (the Southern Cone of South America, which consists of Argentina, Chile and Uruguay).

Service providers-and their customers-are also "rediscovering" the good old U.S. of A. Traditional IT services companies like Accenture, BearingPoint and CapGemini are setting up shop in smaller, less expensive areas like Kansas City; Hattiesburg, Miss.; and Tulsa, Okla. Meanwhile, Indian outsourcers are aggressively building and buying throughout North America.

"Delivery of business and IT services from Latin America and the United States will not supplant what's now being done in India or China," Stiffler says. "It simply enlarges the potential pool of processes and technologies that can be addressed."

All this as the whole outsourcing movement in the States is in the state of decline, 16% this year alone, as discussed in U.S. Demand for Outsourcing Slows Down:

The total contract value of outsourcing contracts signed in the third quarter of 2007 was down 16 percent, with the actual value of the contracts signed shrinking as well, according to outsourcing adviser TPI. At the heart of the decline: the slowing pace of contract awards in the U.S. TPI's numbers show that U.S. companies are also keeping a lid on outsourcing growth, with new scope down 50 percent from last year.

Conversely, Europe and Asia are showing growth in outsourcing deals year over year, with Europe accounting for more than a 50 percent share of global market deals. New scope is up 36 percent in Europe and 72 percent in Asia Pacific, according to TPI. Competitor EquaTerra also found that outsourcing growth was strongest in the Europe/Middle East/Africa geography.

Almost as many Global 500 companies are inking outsourcing deals in the U.S. and Europe (43 percent of leading U.S. companies and 52 percent of leading European companies), says TPI. It's just that the American deals are smaller.

Mega-deals-those once popular billion-dollar-plus behemoths-are still getting signed (by General Motors, Johnson & Johnson, Credit Suisse, Reuters and the U.K. Post Office, among others). They're just getting less "mega." The average size of the billion-plus contract in the first quarter of last year was US$9.6 billion. In the third quarter of 2007, it was down to $2.4 billion, TPI reports.

Major India-based vendors have seen their U.S. customer revenue increase 37 percent, despite the slowdown in overall outsourcing in the Americas, says TPI, adding that "the latter exemplifies the diversity in the global outsourcing industry as well as India's expanding influence and strength." Meanwhile, EquaTerra's third-quarter survey revealed increasing interest in offshoring outside of India. Wage inflation, U.S. dollar weakness and changing buyer demands are driving the expansion of delivery centers in China, Central and South America, and Central and Eastern Europe, EquaTerra notes.

Business process outsourcing (BPO) analyst firm Nelson Hall says the BPO market is hot, with year-over-year total contract value growth of 26 percent in the third quarter and 54 percent growth during the first nine months of the year. TPI characterized global BPO growth as "sluggish." But both TPI and Nelson Hall's reports agreed that BPO contract activity was strongest in North America.

I still believe that American Innovation will more that make up for any cost advantage Off Shoring development will give over the long run, particularly when you consider wage differences moderate for off shore countries as wage competition takes hold.

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