IT Outsourcing Slowing

Outsourcing bubble getting Busted: What should India do? – commenting on the 2006 Global IT Outsourcing Study

Essentially the study says the outsourcing IT will continue to grow though more slowly than it has. It also states the benefits of outsourcing have not reached the level that was predicted for a number of reasons. The study predicts vastly increased competition from China for IT outsourcing work (which reinforces the general consensus).

Perhaps most interesting, however, is the phenomenal growth in the expectations of China as an outsourcing destination. In 2004 only 8 percent of study participants expected to be outsourcing anything to China over a 3–5 year period. In 2005 this number had grown to 40 percent and in 2006 it sits at an impressive 56 percent. We believe that the hype of the Chinese outsourcing phenomenon has potentially outpaced reality.

Outsourcing IT makes a lot of sense but it is complex to do well. The first rush of outsourcing was just an attempt to save money by moving work to sites where the workers could be paid less. This is classic economics and the economic theory has worked well. Capitalists moved work to where the competitive advantage was. The economic reaction was what you would expect – Indian IT wages raised drastically and other costs of doing business have continued to rise (much higher turnover as the opportunities that workers had expanded they jump from one job to another).

Wipro, and others, have been focusing on improving the system by which they operate. They could see the future profits lie in being able to provide value, not just in having low costs. The way to improve the value they can provide customers is to work on the whole system of their organization. That is what they have been doing and that is where the focus will be going forward I believe. How to design management systems to develop IT systems that can accomplish what is needed using resources from around the globe.

In the blog post, Razib Ahmed, provided some suggestions from what India should do and asked: Do you have any other suggestion?

My suggestion would be to do a lot of what they are doing: upgrade the infrastructure, continue to invest in education for science and engineering, open up opportunities to more in India including women, continue to open their capital markets… And I would recommend applying management improvement ideas from Deming, Toyota, Google and others. See our blog posts on software development improvement and innovation and economics for more thoughts.

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