As stories circulate about the cultural barriers U.S. companies hit when outsourcing IT to locations in India, offshore service providers are moving some operations back into the United States -- an effort they hope will increase their appeal to U.S. companies.

Indian service providers, once considered the darlings of the outsourcing industry, today face challenges causing U.S. clients to question the benefit of sending work overseas. Also, as the value of the U.S. dollar drops in relation to the Indian rupee, some offshore providers feel compelled to raise prices, which negates the cost savings U.S. companies expect when offshoring IT work to India. And if smaller India-based offshore providers hope to compete with the IBM Global Services and Accentures of the industry, they must build global service delivery centers and expand their reach beyond their own geographic region.

"While it is less expensive than operating solely in the U.S., the cost of doing business in India has become more onerous because the demand for talent there is so high now that workers want more money and staff turnover has increased," says Mindy Blodgett, research analyst at Yankee Group. "It is also better [public relations] for a U.S. company to be able to say, 'We are outsourcing, but not offshoring.'"

For instance, security appliance maker WatchGuard terminated its offshore contract for services in India with an unnamed provider due to staff attrition and customer service complaints. At the time WatchGuard Director of Global Technical Services Bill Foreman reported that frequent customer complaints drove the decision to move the staff located in India to another location, potentially "stateside or in the Philippines."

Foreman attributed the problems he experienced with high staff turnover as well as an increase in jobs for Indian workers at U.S.-based companies such as IBM. "The attrition there was uncontrollable and we also had issues with the quality of staff available to us. Add onto that customer complaints and language barriers and the situation becomes a time and resources drain," he said.

Despite the cost increase WatchGuard will inevitably incur by locating those positions back in the United States or in the Philippines, Foreman said the company and its customers will benefit long-term. "We want to maintain our customer loyalty. The India support is not what our customers have come to expect for mission-critical equipment," Foreman said.

In response to such scenarios, India-based offshore providers are establishing facilities in more diverse geographic regions. For instance, Wipro, India's third-largest outsourcer behind Tata Consultancy Services (TCS) and Infosys Technologies, in 2007 set up its first U.S., or onshore, development center in Altanta, and also established a near-shore location in Monterrey, Mexico.