Is Offshoring Inevitable?


There are many arguments that indicate that IT outsourcing will not become the only competitive method of software development, as some of the most fervent proponents suggest and labor leaders fear. Christopher Kenton points out in his article, “The Changing Face of Offshore Programming,” that software outsourcing carries large hidden costs. First, there are the administration costs of fully modularizing the development process, and then making sure that every step of the process is fully documented and standardized. Second, there is the difficulty of making sure that the outsourcing partner company follows all of the documentation to spec and upholds the same standards level as the originating company. Kenton points out that there is no cheap way to ensure that contracts are fulfilled to the highest level of satisfaction without housing the entire development process under one’s own jurisdiction. Finally, companies must endure the costs of overseeing the entire process, which are especially high with regard to quality control. Because these hidden costs can be quite high in comparison to the savings made from outsourcing, they can actually make outsourcing uneconomical, particularly for smaller companies with limited budgets and smaller projects. Outsourcing is therefore not always the most cost-effective option, particularly for smaller projects and projects that are design-intensive rather than code-intensive, since these are harder to send overseas.


Some leading voices on the issue, including Dion Wiggins and Diane Morello, argue that outsourcing will become less economical as global competition intensifies and IT wage rates normalize. The IT industry, unlike previously outsourced industries like automotives and consumer electronics, has moved offshore almost overnight. Further, the IT offshoring movement has grown so quickly and efficiently because it is based around ease of access to information facilitated by high quality telecommunications. As a result of rapid communication and the spread of information, these authorities claim, competition between American and offshore firms is very high and global wage fluctuations occur quickly. Currently, Indian IT workers’ wages are increasing as Americans’ appear to be falling. Believers in wage normalization argue that wages will, in the not-so-distant future, continue this trend and reach a level where offshoring loses the great economic advantage that it enjoys today. Outsourcing would then, in theory, lose its popularity and remaining American jobs would be secure. Such arguments fail, however, to acknowledge the enormous differences in cost of living between the U.S. and developing countries like India . Though it is true that Indian outsourcing companies have begun to realize that they can charge more and still retain a large price advantage over American firms, it is unrealistic to presume that Indian IT wages will come close to American levels because the real value of the dollar is several-fold higher in India. It is probable, however, that the wage gap will decrease, making outsourcing slightly less economical and less widespread.

American companies are also likely to receive some protection from governmental agencies. Four states have already passed legislation restricting outsourcing, and the issue has become a major political subject of debate. Because the economics of outsourcing weigh so heavily in its favor, however, it is highly unlikely that protectionist policies will significantly affect rates of offshoring in the private sector. In government administrations, however, public opinion will probably not accept the outsourcing of large numbers of tax-funded jobs, making such jobs fairly secure.

Aside from the above restrictions on unlimited outsourcing and those discussed in other sections of the site, the answer to the general question on whether outsourcing is inevitable is, almost certainly, yes. The truth is, offshore outsourcing is simply so cost-effective that the competitive American market will continue to drive companies toward it, despite the problems it presents.