Offshore Outsourcing Age
Is the offshore outsourcing age finally at an end?
GE used to be one of the biggest offshore outsourcers. It was at the forefront of the offshore outsourcing ‘revolution‘.
However, they now see it as a dated model and Inshoring is now the new mantra.
Said Jeff Immelt, the boss of GE, in The Harvard Business Review, America‘s corporate bible, ‘outsourcing is quickly becoming outdated as a business model for GE’.
Big companies tend to follow each other in a pack mentality into the latest buzz idea, like Business Process Re-engineering and offshore outsourcing.
So, the offshore outsourcing age started.
Now, with the leader of America‘s top conglomerate declaring it an outdated business model so publicly, expect Inshoring to be the new business manta over the next few years.
The main reason for offshore outsourcing was costs. It was usually during a downturn in the economy that companies took offshore outsourcing decisions.
During downturns Cost is the most important business driver.
However, when an upturn comes Time-To-Market takes over. It becomes the most important business driver.
Firms find that, although they had cut costs in the downturn, they were prevented from gaining market share. They also lost increasing profitability in the upturn, by delays caused by building software many Time Zones away.
They also found that communication was much more difficult with people who don‘t speak the same English as you do. They have a different culture. They work at different times than you do. This compares to having the luxury of communicating with someone who is in an adjoining office.
Now, there‘s a new idea for you.
Marks & Spencer
Recently, in the UK, retail giant Marks & Spencer announced that they are going to hire 50 software developers (half experienced and half graduates). That’s as part of a long term plan to bring software development back onshore and inhouse.
M&S CIO, Darrell Stein, told Computer Weekly “Bringing software development in-house will make processes much faster”.
Damn right they will!
The only advantage of offshore outsourcing was Cost. However, that has disappeared rapidly with wages in India and China rising by 20% a year.
Everything else was a negative.
Communication was poorer.
So, this led to poorer quality software leading to extra costs to fix it.
Again, problems with communication led to poorer Time-To-Market.
Normally, when software is developed there is a lot of interaction between the Analyst and the Developer.
As the software developer is looking at it at a more micro level and a more technical level very often the software developer asks questions of the Analyst. This often leads to changes in the specification.
This is easy to do if the two people are working in close proximity to each other.
It is a lot more difficult if the people involved are thousands of miles apart and working in different time zones.
Calculated Cost Savings
Most firms found that they weren‘t getting the cost savings that the calculated that they would get from offshore outsourcing.
Now, with the cost differential having been eroded both by rising wages in the developing world for software developers and the drop in costs here, there is no reason now for anyone to send software development offshore.
This doesn‘t just apply in software development. The cost differential in manufacturing, for instance, has been eroded, as the GE boss has intimated.
Dated Business Model
Now that he has declared offshore outsourcing a dated business model, expect the news over the next few years to be for more and more firms to announce that they are bringing their manufacturing and software development back onshore.
The big boys are already doing it.
Expect others to follow.
That will be great news for US and UK software developers in the coming years. Jobs that they thought had gone forever are repatriated back home.
So, is the offshore outsourcing age coming to an end?