When is Outsourcing not Outsourcing?

When you think about outsourcing, what picture comes to mind? Do you automatically envision an exodus of jobs to foreign lands, or do you imagine an army of consultants poised to take over your company's IT functions?

Outsourcing can take two forms. First, there's local outsourcing, in which a company's IT department takes on the services of an outside consulting firm. Typically, companies use this type of outsourcing to farm out individual projects or to bring in specialized skills for ongoing services. Local outsourcing essentially enables an IT department to take on projects that can't be handled by its current resources. Another claimed benefit of outsourcing IT resources is the ability to focus in-house resources on a business's core competencies rather than on its IT infrastructure. Because the outsourced resources tend to be local companies, opinions of this form of outsourcing are usually fairly positive, regardless of the company's location.

The second form of outsourcing, however, is offshoring, in which projects, departments, or even the entire IT infrastructure is shifted to foreign-based workers. The practice of offshoring has generated quite a bit of controversy and the downside is all too apparent for local workers, especially in today's challenging economic climate.

What are the factors in deciding to offshore rather than outsource locally? Certainly, cost savings are a major motivator when it comes to offshoring. IT labor rates in countries such as India are much lower than the corresponding rate of pay for US workers, and proponents of offshoring claim substantial savings of 20 to 50 percent over the cost of managing projects in-house. Lower costs let organizations take on projects that otherwise wouldn't be possible. Businesses that adopt offshoring also often cite the need for global competitiveness. These companies claim that foreign competitors can market their products for lower prices, thanks to lower labor costs, and that offshoring is the only way to stay competitive with foreign-based companies.