It may seem counterintuitive, but the recession forced companies to put the brakes on outsourcing IT and other jobs. But with growth returning, outsourcing was hot again in 2011 -- and it will be hotter this year, says Christopher Ford, a partner who runs the Morrison & Foerster law firm's Global Sourcing Group. What's more, most of the election-year rhetoric about keeping jobs in the United States is just that: rhetoric, or as Ford puts it, "a shell game."
Ford's law firm just published a report that shows changes in the outsourcing market. Although the group generally sees continued growth in the use of IT outsourcing, it's not all going overseas (that is, being offshored). In some segments, the "send it abroad to save a buck" argument no longer holds water, and that's meaning "insourcing" to providers in the U.S.
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For example, Ford says "labor arbitrage" -- the difference in wage rates between the United States and other countries -- is decreasing, particularly in the eastern region of China, where Foxconn and other giants crank out products for Apple and many other U.S. technology firms. Indeed, the Chinese themselves are well aware of that trend and are emphasizing advantages beyond cheaper labor costs. That's an important issue in the manufacture of consumer electronics products like the iPad, which have labor costs that are a relatively small part of the overall price of goods sold.
Meanwhile, lower-wage areas of the United States are starting to see companies moving in, a phenomenon Ford calls "rural-sourcing." Although many, and perhaps most, of the companies shifting to rural America are still small, large companies are also packing up and planting parts of their operations in places like North Dakota. For example, Microsoft has been in that state since 2007, and last year it opened a campus in Fargo that employs about 1,500 people. Not coincidentally, North Dakota has the lowest unemployment rate in the entire country: 3.3 percent at the end of 2011, compared to the national rate of 8.3 percent.
The key trends in outsourcing
With offices and associates on three continents -- North America, Europe, and Asia -- Morrison & Foerster is an important deal maker and adviser to companies that are outsourcing, and it has a global view that makes its report worth reading. "The U.S. outsourcing market is recovering, with the financial services segment leading the pack. For all industry sectors, however, 2011 activity was essentially at or above the five-year average, which we take as an indication of a broad-based increase in overall economic strength -- and a rising tide that is lifting all boats," the report says.
Why did outsourcing slow during the worst of the recession? Companies balked at the high upfront costs of outsourcing (you pay the outsourcer a big chunk of change to learn your processes and technology, hire people, train them, and then transfer the work), and they weren't willing to wait the years it would taken to recover that initial outlay through subsequent savings, Ford says.
The report reveals other key findings.
- China is moving beyond manufacturing: Today, the Chinese outsourcing industry is roughly a $20 billion business, and the Chinese government is intent on growing that number. The country's list of designated outsourcing "hub" cities was expanded from 10 to 21. Companies providing outsourcing services to other countries in these locations receive various tax breaks through 2013. The government is encouraging Chinese firms to proviide outsourcing services for a broad range of technologies. These include not only traditional services such as application development and maintenance but also animation and special effects for the television and videogame industries, as well as R&D services for the pharmaceutical industry.