Will U.S. IT Pros Benefit from Rising Cost to Offshore?

By Deborah Perelman  |  Posted 10-23-2007
Did the golden age of software offshoring end in 2005? Between 1995 and 2005, when the dollar was strong and the post-communist countries were felled by low wages, there was often a 5-to-1 cost advantage borne by outsourcing IT development projects.

In 2007, reports of rising wages, high turnover and the fact that foreign software talent need not turn only to the United States for work have led some to declare that offshoring is sputtering to an end.

This was the topic of a recent blog entry by Andy Singleton, president of Assembla, a global staffing consultancy that also provides online work spaces for development teams. "There was a time not very long ago when, really, you didn't have to be very smart to realize that to reduce cost, you could just ship the work to a different place, and that it was virtually impossible for a U.S.-based programmer to compete in this market," Singleton said.

However, he said, it was a simplistic model. Now that the price advantage is disappearing, managers don't have the easy option of just moving work and hoping that cost advantages cover any inefficiencies. They have been forced to work smarter or not offshore to gain cost advantages alone.

Does this mean that the IT professional's long international nightmare is over? Absolutely, Singleton said in an interview with eWEEK, CIO Insight's sister publication. "IT workers in the [United States] can breathe a sigh of relief. They are becoming price-competitive with their most numerous competitors in India, which is one reason that demand for U.S.-based staff now exceeds supply," he says. "IT workers in other locations are also doing well."

Contrary View: Offshoring Ramins

But others disagree, arguing that IT professionals need to be as worried as they ever were about losing their jobs to someone who works for a lot less. "Outsourcing is pretty much as prevalent as always," Gartner analyst Diane Berry says. "You may not hear the flurry that you did in the past [but] folks are still outsourcing. Some may not have executed as well as they should have and may be bringing some back in, but in general [it is] still taking place."

However, the majority of opinion falls in the middle. Offshoring is still a threat to IT jobs, but companies are moving away from making decisions based on cost savings alone. "To say that offshoring is dying is a bit too extreme," says Jeremy Leonard, chief economist at the American Sentinel University. "People are doing a reality check of the benefits versus the costs of offshoring. The carrot that was dangled out for people was the differences in wages, and when people first saw the money that could be saved, it opened their eyes."

Organizations are beginning to realize that much of what is lost in outsourced relationships can cost nearly as much money as they were saving in the first place. "You lose things when you offshore," Leonard says. "Face-to-face contact--depending on what kind of IT you are in--despite video conferencing and other technology available. In my experience, if you can't sit people down in a room to collaborate, something is lost Timing is also an issue. A lot of locations are halfway around the world and there can be inefficiencies due to the time difference, and if they are willing to work at night or not."

This stands to offer IT professionals, who have long known that they simply could not compete with pay rates one-tenth of their own salaries, some relief. "Offshoring is a part of the business now in IT, but I still don't think of it as a threat to overall job growth," Leonard says.

Instead, he sees what he considers a bifurcation of demand for IT jobs, where the high-end work such as system design and analysis currently has a very strong job market, "as high as we saw in the 1990s. The low-end IT, such as rote and support work, is continually offshored. "It is imperative to keep your skills up-to-date and move up the skills ladder into these higher-end IT jobs because it cannot be denied that there are places in the world where the other work costs a lot less," Leonard says.

This sentiment--that while offshoring is being approached more thoughtfully and selectively, IT professionals are far from the safe zone--was echoed by others.

"The storm has not passed," says Dave Elchoness, a former IT outsourcing executive and founder of VRWorkplace, a provider of virtual workplace solutions. "Certain employee jobs will continue to go to cheaper labor markets; other jobs that are more client-facing will be far less likely to move offshore."

The best thing that IT workers can do is position themselves in roles that will be hard to recreate elsewhere because they include significant business-specific knowledge, Elchoness says.

"Globalization," he says, "is an inevitable thing."