Noticeable shifts are taking place in the way IT offshore outsourcing is done. A number of companies are dedicating their outsourcing business to smaller budgets, smaller contracts and smaller destinations. Meanwhile, many IT professionals are aiming closer to home, with an average of 9.3 percent of IT budgets this year earmarked for outsourcing within their borders.

As manufacturers and engineers worldwide wrestle with the quickening pace of offshore outsourcing, experts are trying to get their arms around globalization’s implications for the future of innovation and industry jobs.

Between 2000 and 2003, for instance, an estimated 400,000 U.S. IT manufacturing jobs were lost, according to presidential advisory panel statistics. In 2005, about 24 percent of North American companies used offshore providers to meet some of their software needs, according to Forrester Research.

However, although offshore outsourcing IT continues, there is a noticeable shift in the way such initiatives are done: companies are going for “small” in three significant ways.

1) Smaller contracts
Companies now “seek to grow outsourcing value with smaller deals,” reports IT Business Edge.

Advisory firm Morgan Chambers says that companies in the United Kingdom, for instance, will shy away from multimillion-dollar outsourcing contracts in the coming year. Instead, they will spend 20 percent to 25 percent of their outsourcing budgets on small offshore contracts.

IT Business Edge notes:

It’s a trend previously noted by other observers. According to IDC, the total contract value of the world’s top 100 outsourcing deals declined 3.1 percent, from $70.1 billion in 2004 to $67.9 billion in 2005. Yet the number of deals valued at $250 million or less nearly tripled, from eight in 2004 to 23 in 2005.

2) Smaller budgets
An IT trends study by the Society for Information Management (SIM) in the last months of 2006 found only 3.3 percent of 2007 IT budgets devoted to funding offshoring activities.

In addition, the survey of nearly 140 chief information officers and IT executives from around the world found that two-thirds of organizations surveyed are not dedicating any funds at all to such initiatives.

On the other hand, when it comes to outsourcing budgets, “IT professionals are aiming their budgets closer to home.” An average 9.3 percent of IT budgets are earmarked for domestic outsourcing, with more than a third dedicated to internal staff. Manufacturers increasingly are looking at on-shoring opportunities closer to home in response to higher-than-anticipated total landed costs, quality issues, longer lead times, port congestion and higher fuel costs, according to Bernie Hart, global product head of JPMorgan Chase Vastera.

Likewise, according to the 2006 Duke CIBER/Booz Allen offshoring study, which examined 530 companies from both the U.S. and Europe, the majority (59 percent) of outsourcing continues to go to other locations within the country.

Further, a new Aberdeen survey has found that companies are banking on the outsourcing of some of their application-related work to help boost the skills of their internal IT professionals and let them plunge their hands into more strategic initiatives.

While India-based providers are churning out a lot of work in the applications area — especially from the U.S. — many IT organizations feel it’s important to have “near shore” capabilities so that they and their providers can work in closer proximity, minimizing communications gaps.

Of course, this is not to say that offshore outsourcing IT is going to stop. In fact, contrary to the previous data, IDC says that spending on offshore IT services over the next five years is set to increase at a compound annual growth rate of 18 percent.

3) Smaller locations
Many businesses are fed up with the powerhouse outsourcing hub of Bangalore, India, where salaries for IT staff are growing at 12 percent to 14 percent a year, turnover is increasing, and an influx of workers is straining infrastructure and city resources.

Reports BusinessWeek:

Even Indian outsourcing pioneers Tata Consultancy Services, Wipro Technologies and Infosys Technologies, which have helped foreign companies shift software development and other IT operations to Bangalore, are starting to expand into smaller Indian cities, as well as China.

As such, companies are setting their sights on a number of emerging hot spots for IT outsourcing: Bucharest, Romania; Moscow and St. Petersburg, Russia; Prague in the Czech Republic; Mexico City, Sao Paulo and Santiago in Latin America; Dalian, China; and Ho Chi Minh City, Vietnam.

OK, so some of these “small cities” are, in fact, not that small. Nevertheless, they are only now growing as popular offshore outsourcing destinations.

Of course, moving IT operations into developing countries like Vietnam or China can also pose big risks, such as language and cultural differences and geopolitical instability.

Then there are those pesky intellectual property (IP) issues.

Aberdeen Group’s Product Intellectual Property Benchmark Report, released last month, disclosed increasing globalization of product development, with protecting product IP, as its top challenge.

According to a survey by Brown Jacobson, a leading UK law firm, a poll of 220 UK business owners found less than half (49 percent) had any clear policies in place for protecting IP rights.

When making the decision to move or strengthen functions — IT or otherwise — companies must factor in all benefits and risks, evaluating sourcing options based on the strategic and financial value they bring to the overall business strategy.

Resources

Companies Seek to Grow Outsourcing Value with Smaller Deals
by Ann All
IT Business Edge, Jan. 2, 2007

When It Comes to Outsourcing, IT Professionals Are Aiming Their Budgets Closer to Home
Global Logistics & Supply Chain Strategies, Nov. 2006

Global Supply Chain – 2007 Risks and Rewards
by Bernie Hart
Supply & Demand-Chain Executive, Dec. 22, 2006

Duke/Booz Allen: Companies offshoring high-end functions to access talent needed to drive growth
Nov. 1, 2006

Outsourcing Application Development and Maintenance
by Rick Saia, Peter S. Kastner
Aberdeen Group, November 2006

Outsourcing: Beyond Bangalore!
by Rachael King
BusinessWeek, Dec. 20, 2006

Intellectual Property (IP) Friendly” Collaboration: Limiting Unnecessary Exposure of Company Know-how
Aberdeen Group, Dec. 13, 2006

How to value your IP
by Richard Nicholas
Freelance UK, Dec. 15, 2006