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IT offshoring savings declined for past 5 years

Stephanie Overby | Jan. 31, 2011
The average savings achieved by IT offshoring has declined for the past five years, even as companies expanded their offshore initiatives, Duke University's sixth annual corporate offshoring study found.

From a long-term point of view, the statistics are clear that fewer Americans are entering science and engineering careers as indicated by the number of advanced degrees awarded. The trend began in 1995. Part of our research approach is to look for "small, initiating events" whose impact may not be seen for a number of years. In 2003, Congress allowed the H-1B quota to lapse which greatly reduced number highly skilled workers that companies could bring in. The H-1B shortage was about 130,000 visas. In addition the cumulative shortage of American nationals earning advanced degrees in science and engineering reached about 49,000. Indeed, in 2004, the unemployment rates in almost all engineering subfields were at historical lows.

In 2008, something else has happened. Companies began to realize the strategic importance of entering new markets like Brazil and China and they needed learn how to do product development and other work in those countries. If you're Boeing (BA), where is your source of major top line growth? It's not in the United States. Companies are facing the challenge of creating an organization and processes that are aligned with their new markets. When you asked service providers about their biggest concerns, pressure on margins was number one. Should that concern customers at all?

Lewin: Customers will benefit greatly. The new variables [putting pressure on provider profits] are that some countries have developed national policies to attract the outsourcing industry. Go to Dalian, China and there are at least 200,000 Japanese-speaking Chinese doing work for Japanese companies. According to KPMG, the current value of executed contracts is $5 billion—just in Dalian. Many countries are following the lead of China to establish national aspirations to attract the outsourcing industry—Sri Lanka, Morocco, and Egypt.

The competition is not just among providers, but also between countries. At a new tech park being built outside of Shanghai, a deputy mayor told us that a million people will be conducting back-office work for financial services companies within five years. In India, the total number of employees directly employed in the provider industry is only about one million people. Companies are starting moving up the value chain with their offshoring—32 percent of your participants indicated that they now offshore innovation services. But it's not clear what exactly is driving that. You found that 88 percent of those who offshore innovation services say access to qualified offshore talent is the driver, but less than a third say a domestic shortage of qualified personnel is a driver. And, as you note, unemployment rates in the U.S. have reached historical highs due to the recession. So what's going on here?


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