The phrase “offshore outsourcing” has become ubiquitous in Information Technology (IT) industry. It is spread all over in trade publications, and you can hear it in many places ranging from company boardroom to water cooler. If you are involved with any facet of IT industry, it is important to learn more about this latest development in evolution of industry.
In this article, I will present an overview of offshore outsourcing scene and various ways in which companies are involved in offshore outsourcing. At end, a set of recommendations is listed for business owners, managers, and other stakeholders who are considering offshore outsourcing for their organization. Please be advised this article only addresses IT offshore outsourcing. It does not cover outsourcing in other industries.
Let’s start by defining term “offshore.” Offshore in phrase “offshore outsourcing” refers to any country where wages for IT professionals are substantially lower than in US, UK, Western Europe, and Japan. The major destination countries for offshore work are India, Russia, and Ireland. Other places to note include countries in Eastern Europe, such as Ukraine and Bulgaria, Brazil, South Africa, Israel, and China. Low wages in these countries are a result of low cost of living. The wages in these countries can be anywhere from one-third to one-tenth of wages for similar skills in Western markets. It is worth mentioning that IT skills in these nations translate into 20-50% higher salaries than their respective national average salaries for all professions.
Next, let’s define term “outsourcing.” From a business point of view, outsourcing is a situation in which a defined piece of work is performed by an external third party provider. At times line of authority of an external provider can be blurry - a global company may pass around work among different departments spanning company’s own offices in multiple countries. Generally speaking, however, outsourcing involves two or more independent companies working together. For example, American Company A prepares specifications for a software application, and then passes it to Ukrainian Company B for actual design and development. After work is completed, Company A receives finished product from Company B. Software development is one type of IT work that can be outsourced. Remote system administration and product maintenance are some other types of work that are routinely outsourced by IT firms.
Putting our definitions of offshore and outsourcing together, we can now effectively define IT offshore outsourcing – it is outsourcing of IT work to offshore countries. Offshore outsourcing is actually not a recent phenomenon. IT offshore outsourcing has been occurring as early as 1970’s. There were several Indian companies that provided services to American firms at that time. IT offshore outsourcing started to take off in early 1990’s and gained further popularity during Internet Boom of late 1990’s. Then, with crash of Internet Boom, offshore outsourcing came into center stage – biggest driver was fact that businesses were scrambling to cut costs and offshore outsourcing provided a viable means of lowering cost of operations and new development.
Below are different categories that can be used to group companies working in offshore outsourcing space -
Type I: Fully offshore. These are small companies operating in offshore countries. They can have anywhere from 1 to 50 employees. A major feature that distinguishes these companies is that they spend very little, if anything, on external marketing. Their business mostly comes from word of mouth promotion and referral from existing clients. Rarely do they have offices in countries where their clients come from. Also, freelancers and informal teams of friends and associates working together are part of Type I category.