Offshore outsourcing satisfaction drops

DiamondCluster International's annual study of information technology outsourcing found that the number of buyers satisfied with their "offshoring" providers has fallen from 79 percent to 62 percent. In addition, the number of buyers prematurely terminating an outsourcing relationship has doubled to 51 percent.

"The blame cannot be heaped solely on the shoulders of providers," DiamondCluster consultant Tom Weakland said in a statement. "Many buyers are now several years into at least one outsourcing relationship, but they still lack effective measures to gauge the success of their outsourcing initiatives, which are critical for knowing and getting what you want."

"As the U.S. dollar drop(s) in value, offshore outsourcing will likely get more expensive. Employers thinking long-term on outsourcing tasks need to keep this in mind. As the dollar buys few(er) rupees (and probably yuan soon), wages in these countries will appear to rise.

Software outsourcing is also vulnerable to the high cost of fuel. Many software engineering tasks require extensive investigation and training...A couple of trips across the ocean, and you've eaten up any profit you may have gained from hiring cheap labor overseas."
--Drake Mardrone

Despite the declining satisfaction with offshoring providers and more buyers ending outsourcing deals early, DiamondCluster's study found that 74 percent of buyers expect their use of IT outsourcing to continue to increase in the coming year, up from 64 percent in 2004.

The report is based on surveys and in-depth discussions with 210 senior IT executives at "global 1000" companies and with 242 senior executives at outsourcing service providers in the United States, India and other countries. Research was conducted in late 2004 and early 2005.

Outsourcing refers to farming out tasks to a separate company. That company's operations might be in a lower-wage nation, which makes for so-called offshoring. IT head honchos are planning to push more of their tech tasks to low-wage countries, according to a Merrill Lynch survey earlier this year.

Business leaders defend offshoring as ultimately good for the U.S. economy and its workers. Critics of shipping high-wage work to lower-cost countries are concerned about job loss in the United States.

In the short run, at least, U.S. techies may be more the losers than gainers when it comes to offshore outsourcing of IT work. A report last year sponsored by the Information Technology Association of America trade group on offshore outsourcing of software and IT services indicated that sacrifices by U.S. IT workers would result in an improved U.S. economy overall.

Politicians have entered the fray. Recently, the House of Representatives passed "Buy American" legislation that would force the Department of Homeland Security to buy products mostly made in America.

According to the new DiamondCluster report, worries about anti-outsourcing legislation and political pressure have waned, but 88 percent of buyers remain concerned about employee backlash.

The study also found increased interest in sending tech work to China. Forty percent of buyers expect to outsource some IT functions to China during the next three to five years compared with 8 percent last year, the report said.