Offshoring has taken a hit, but may come back even stronger

When the economy gets better, they may start buying U.S. consultancies and transfer that work abroad, too

IT professionals may take some short-term comfort in the fact that outsourcing, an industry segment that should be growing as companies look for ways to reduce costs, is actually seeing slow gains along with the rest of the economy. But there are signs that when outsourcing comes back, it may take even more jobs away.

I spoke with two outsourcing experts to confirm this: Ashok Vemuri, global head of Banking and Capital Markets for Infosys Technologies, and Tom Pettibone, managing partner for Transition Partners, an outsourcing consultancy.

[ Beware the false promise of easy savings from outsourcing. Find out how a bad partnership could cripple your company for years. ]

Wait-and-see while the economy remains uncertain
However, both executives say the current slowdown in outsourcing may indeed be very temporary. Pettibone says companies are simply taking a wait-and-see approach. Unsure of where they are going to be in six to eight months, they are not yet ready to make a long-term outsourcing commitment. But it may come.

"Outsourcing takes a commitment on the part of the IT shops. If a shop is going to do certain projects in India, you have to go to India and establish relationships and systems. They are not ready to do that yet," says Pettibone. Instead, they are saying let's see what happens to sales and revenue projections first. If business does pick up, a company will then commit to an outsourcing deal where they believe, according to traditional business logic, they will save money through labor arbitrage (business jargon that means essentially "chase the lowest-cost labor").

Still, until companies feel confident enough to commit to a contract, outsourcers are in for bleak times. And in the meantime, things could be getting even bleaker.

Will offshorers buy up U.S. jobs to transfer home?
Despite the slowdown in offshoring contracts, Vemuri says Infosys is shopping around to buy an American consultancy -- and possibly a European consultancy -- to supplement or complement its front-end consulting capabilities. "We are sitting on $2 billion in cash," Vemuri tells me.

However, unlike other foreign companies that plant a flag in the United States and go on to open up job opportunities here -- I'm thinking of the auto industry in particular -- Pettibone warns that if Infosys buys a U.S. company, it may be buying just the clients and taking the work back to India. It's a clear example of more of that "labor arbitrage" I was talking about.

The offshoring phenomenon looks poised to expand beyond the tech industry. In fact, some analysts say Infosys is looking at buying a pharmaceutical consultancy. That makes sense, because health care is the only industry segment that showed growth last year. On top of that, the Obama administration's stimulus package promises to inject billions into health care, although that is at least 12 to 18 months away from creating significant new business.

Vemuri says that we're seeing nothing more than talk when it comes to a health-care technology spending boom: "No one has stepped forward and made a significant spend." But think about it: What better time is there to buy an American healthcare consultancy than before the actual boom is under way?

And it's not just health care that may be ripe for offshoring. According to Vemuri, there is a lot of virgin territory in terms of industries that have not traditionally used outsourcers. New industries coming on to outsourcing bandwagon are media, entertainment, energy, utilities, space, heavy engineering, and manufacturing.

In addition, outsourcers are branching out offering new services like integration and change management. "Now we are getting called in to do that," Vemuri says.

More people may feel the offshoring angst if Vermuri is right.

Government jobs may not protect existing jobs at well, either
On the plus side, Pettibone says that the government is the fastest growing job sector in the country due to new regulations and systems expected soon from the Treasury Department, SEC, and FDIC. By law, the government work cannot be sent offshore. Still, it can be outsourced to places like Kentucky or North Dakota. You don't get the same "labor arbitrage" advantages there as you would in India or China, but they're still less expensive than New York or Boston, according to Pettibone.

But I wonder if that isn't another reason why Infosys is shopping around. Perhaps if it buys a U.S.-based business and keeps it here, it can pick up a lot of that government work, too, in those cheaper U.S. locales.

Well, that's what capitalism is all about: competition. It's supposed to up everybody's game and create the kind of vibrant economy that has given America one of the highest standards of living in the world. I guess we'll just have to wait and see if it continues to go that way for us.