Kirk LaughlinDepending on who you listen to, US companies are either already jeopardizing their long-term ability to innovate and compete due to excessive IT outsourcing, or are not even close to maximizing the potential benefits IT outsourcing has to offer.
Harvard Business School professors David Pisano and Willy Shih come down strongly on the side of IT outsourcing having gotten out of control, while others we spoke with say this is just nonsense.
IT Outsourcing: Too Much of a Good Thing?
In a July 2011 CIO Magazine article, Pisano and Shih argue that as US companies have been outsourcing higher- and higher-value IT functions abroad, they have begun eroding important competitive capabilities, both for themselves and others in their market. Pisano and Shih call this concept “industrial commons,” saying outsourcing higher-value functions can damage capabilities embodied in a company’s workforce, supplier network, and surrounding educational infrastructure.
The authors emphasize they are not opposed to outsourcing per se, but are just concerned that US companies are taking a short-term, profit-driven view of outsourcing at the expense of longer-range strategic concerns.
IT Outsourcing Aids US Competitiveness
Belatrix Software Factory VP of Business Development Alex Robbio has a different take on the “threat” posed by excessive outsourcing of IT functions by US companies. He took time from his busy schedule to explain to Nearshore Americas why he thinks the concerns raised by Pisano and Shih are overblown.
“I’ve run software companies in the US and have found strategic outsourcing adds competitiveness to American business more than subtracts from it,” stated Robbio (Belatrix Software Factory provides Nearshore and offshore software outsourcing services). Robbio contrasted what he sees as the more progressive US view of outsourcing to a more narrow-minded view held by many European businesses.
At issue: Are US companies taking a short-term, profit-driven view of outsourcing?
“In the US when companies face challenges of needing to grow and to expand R&D, they realize this happens everywhere, so why not tap into it?” said Robbio. “A lot of US companies haven’t tried outsourcing yet, and they tend to be less competitive. Companies that are outsourcing well and strategically are at the forefront and are winning.”
In comparison, Robbio said many European companies take the attitude that if something isn’t developed in their native country, it isn’t any good. “I’ve noticed countries with cultures that have that attitude tend to be less competitive and don’t play a major role internationally,” he said. “I believe one factor is closemindedness when it comes to outsourcing. They’d rather not do something than get outside help.’
Latin America is Underutilized
When it comes to Nearshoring US IT operations to Latin American providers, Robbio said the potential is still generally underutilized. “The reality of IT outsourcing in the US was invented by Indian companies,” he explained. “The model has been pervasive, but companies applying older models don’t take advantage of Nearshoring.”
For example, Robbio said Belatrix will get bids for Nearshoring projects asking for onsite personnel. “You don’t need that with Nearshoring,” he commented. “We don’t have the time differences or cultural gaps you find with providers in India or China.”
It Could Happen, But Not Likely
Robbio conceded the threat of excessive IT outsourcing does exist in theory, but is not likely to occur. “For example, Apple outsources 100% of its manufacturing, meaning in the US you don’t have people who understand that side of the business, which could have an effect,” he said. “But I don’t think it will happen. Self-balancing mechanisms come into play. You know when you are outsourcing too much. I don’t think anyone will outsource to the point it will be detrimental to long term strategy, even if it saves money.”
As evidence of the substantial room for outsourcing growth he sees, Robbio cites research he has done on the job markets of tech-heavy states such as California, Massachusetts and Texas. “At any given point, there have been hundreds of unfilled IT positions, even during the economic crisis,” he concluded. “If outsourcing were at the point of disturbing US business, I don’t think they’d be hiring. Outsourcing is not incompatible with the US job market.”
Excessive outsourcing ("abdication") is when there is total lack of strategy and only focus on short term gains to reduce cost without worrying about losing IP and knowledge and long term wellbeing of the organization. Is there a threat of that happening? Sure! But will every CIO suddently become irresponsible and race towards type of outsourcing, I doubt it.
Pisano and Shih are correct. By outsourcing the high value IT work offshore, the country and the business community lose the technical edge we one had; we lose company private data; and we lose economic strength.
When it came to IT, the problem that drove the US companies offshore was the failure of our education system to provide industry the necessary technology workforce. It was not cost. We graduated many times more lawyers and social workers than we did software engineers in the 1995 era. India, in the 1990s wrapped up their education to deliver to industry the resources our education system failed to do.
To claim that outsourcing adds to competitiveness as Alex does is a hollow argument.