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Offshoring Still Not a Midmarket Word

Two years ago, it seemed that unless half your application development staff was in Bangalore, you were giving money away. Offshore outsourcing was the talk of the town for both business processes like call centers and classic corporate IT functions.

In 2005 the chatter about offshoring grew muffled. But that doesn't mean that companies stopped using the practice. In fact, overseas outsourcing is growing faster than ever; the Indian IT outsourcing industry projects that offshoring in India will continue to grow in the range of 30% in 2006. You just hear less about the use of the practice because businesses have grown wary of a negative PR backlash.

Regardless, IT offshoring is still an option employed largely by the biggest companies, not midmarket firms. According to Peter Bendor-Samuel, CEO of the Everest Group, a Dallas-based outsourcing consultancy, the initial costs and economies of scale required to justify offshore IT outsourcing render it a palatable option "for the Fortune 50, though we see it dropping down to the Fortune 100 in 2006."

That upswing has been documented elsewhere. In a September 2005 survey of 420 U.S. companies of all sizes, AMR Research Inc. found that while 17% of respondents used offshore outsourcing to perform infrastructure management in 2005, 30% plan to do so next year. And while 20% used offshore outsourcing for application development in 2005, 34% plan to do so in 2006.

Even if offshoring is beyond the reach of many midsized companies, there are lessons to be learned from the experiences of larger firms. Managing contracts and relationships is time-consuming but nonetheless essential to making a partnership work; miscommunication can eat away at precious savings.

And offshoring isn't always a fit. Consider the now-legendary move by Dell Inc. to bring some of its voice-based customer service operations back to North America from Southeast Asia after receiving criticism about service quality.

In a June 2005 survey of 210 senior IT execs at Global 1000 firms and 242 executives at outsourcing service providers, Chicago-based management consulting firm DiamondCluster International Inc. found that satisfaction with offshoring providers has decreased from 79% in 2004 to 62% this year. While many factors contribute to a U.S. company's perception of its provider, the best fit requires ample due diligence.

This was first published in December 2005

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