Although offshoring has evolved into a mature industry, companies continue to contend with certain aggravations, including time differences, communication barriers and high turnover rates.

Offshore outsourcing has evolved from a little-used practice to a mature industry in less than a decade. Yet there’s still plenty of change ahead.

Today’s global economy seems to have created more job setbacks than job growth. Case in point: New research from The Hackett Group suggests that many companies will be “increasing their use of offshore resources by 50 percent in the next three years, while cutting costs by up to half through the use of cheaper overseas labor.” This tremendous growth, however, does come packaged with growing pains.

The Hackett Group surveyed 50 companies — 70 percent of which have revenues greater than $5 billion. As the research is dissected, the tremendous cost-cutting efforts at the heart of the findings is another indication that companies are much more concerned with bottom line growth instead of truly competing in a global economy that begs for driving innovation and top line activities. By 2010, participants from The Hackett Group survey predict they will have nearly a third of all their finance staffs in low-cost labor markets.

To be fair, one of the primary reasons to offshore is to optimize more core competency, reduce unnecessary operational complexity and free up innovation resources.

A recent article at CFO magazine titled Offshoring is Still Going Strong notes that companies frequently “face a choice between offshoring parts of their businesses to foreign firms or using ‘captive’ models, for which they set up their own operations and hire staff in another country.” While research suggests that “both practices bring the same cost-cutting benefits [...] captive programs tend to produce more innovation and better customer service because companies pick their own people and can more easily monitor them.”

But with rapid growth in offshore outsourcing issues arise as companies struggle to figure out the business case for their offshoring efforts. This year could be a record year for offshoring contracts, according to the CFO article, as contracts awarded in the first half of 2008 were worth more than at any time in the last three-and-a-half years. The volume is projected to grow by 10 percent to $87.4 billion.

CFO magazine reports:

That growth represents a resurgence from just two years ago when offshoring had hit a lull in the face of negative publicity and political backlash. Offshoring has benefited from better and cheaper communications technology and companies gaining familiarity with the concept, says Hackett’s chief research officer Michel Janssen, but rising wages in emerging markets and a weaker dollar — which makes foreign labor less of a bargain — could be obstacles to further growth.

But that’s just the tip of offshoring’s problematic iceberg.

Just like outsourcing’s concerns around language and communications problems in managing overseas workers, offshoring is also feeling the pain in this area, according to Todd Olson, president of 6th Sense Analytics, which tracks offshoring performance.

Managing large time differences can also waste time and resources as a foreign staff can be delayed for hours awaiting instruction from far away bosses. Moreover, turnover can be painfully high as competition for talent is intense and employees do not hesitate to leave for a better deal when they get some experience.

India remains the top offshore location, according to Gartner Research. It also ranked at the top of A.T. Kearney’s 2007 Global Services Location Index and claimed an estimated 11.5 percent share of the global market, according to some estimates. But China (which had an estimated $13.1 billion in offshoring revenue at year-end 2007), Latin America (particularly Brazil and Argentina) and Eastern Europe (Russia) are quickly becoming more credible with more offshore work expected to go there. As we noted earlier this year, offshoring experts have also recently cited Africa and the Middle East as up-and-coming hot spots, although those regions — like Latin America — still have outsourcing-related issues to work out before they trump the juggernaut that is India.

Gartner predicts that offshore spending by American firms will grow by 40 percent in 2008 and that European firms alone will increase spending by 60 percent.

“The job markets in these places are hot and people are very aggressive and ambitious,” Olson says. “This is their opportunity and you have to accept that people will leave.”

That said, some experts believe that as long as offshoring escalates in the U.S., so too will the pay packages of U.S.-based IT workers. And according to a recent article from Network World titled Has Offshoring Harmed U.S. IT Workers?, one study concludes that offshoring’s impact is minimal to the U.S.-based IT jobs.

It is “difficult to ease offshoring fears because a lack of solid data makes it impossible to strongly refute consultants who have said that IT offshoring is already large and will soon get far larger,” Raymond Panko, professor of IT management at the University of Hawaii, writes in his 36-page report IT Employment Prospects: Beyond the Dotcom Bubble (via Network World). “However, in the few cases where we should be able to measure offshoring job losses, there is no evidence that massive job losses have occurred.”

Recent: Offshoring: Today and Tomorrow

Resources

The Hackett Group

Offshoring Is Still Going Strong
by Alan Rappeport
CFO.com, Aug. 14, 2008

Offshoring for Long-Term Advantage
A.T. Kearney, 2007

XMG Estimates 2007 Global Outsourcing Market at US $297 Billion
Tekrati.com, 2007

Has Offshoring Harmed U.S. IT Worker? One Researcher Says ‘No’
by Jon Brodkin
NetworkWorld.com, Aug. 20, 2008

IT Employment Prospects: Beyond the Dotcom Bubble
by Raymond R. Panko
European Journal of Information Systems, June 25, 2008

Offshoring Trend Sparks Rise in IT Wages
by Jo Best
silicon.com (via ZDNet), Aug. 27, 2008