Forrester clients are looking for more options when it comes to IT service and outsourcing providers, and there’s a new option available to them: domestic outsourcing.

For many years, India has been the answer for large companies that need to save money and increase their IT bandwidth. Indian vendors, in fact, revolutionized the IT services industry by delivering higher quality, lower cost services with a never-let-the-client-down mentality. Now, however, the market has “overcorrected” in terms of outsourcing IT work. Companies, whether they work with a pureplay Indian vendor such as Infosys or a US-based vendor such as IBM, have to buy the bulk of their programming talent from India.

Unfortunately, today, India is not the best delivery location for all IT work or for all companies.

First of all, India is overworked — some might even say tapped out. The excess demand for Indian labor has meant that clients are less satisfied with their offshore IT services:

  • Costs are escalating and narrowing the gap relative to US costs.
  • Employee turnover is too high.
  • Time-to-market is impacted by rework and time zone issues.
  • C-Player and “fresher” syndrome reduce quality and productivity further.
  • It is increasingly difficult to land offshore resources onsite using H1B and other visas.
  • Communications challenges persist and are exacerbated by the increasing use of Agile methods.

Second, the role of technology in business is changing. To build technology solutions that drive the business, as opposed to just enable the business, technologists need to have more contextual understanding — so they understand, intuitively in some cases, what the business wants without the business having to specify it. That contextual understanding is very hard to get from a non-native. This means that clients spend tons of time trying to specify their needs so a non-native developer can interpret and build to suit those needs. As agility becomes increasingly important, this approach does not suffice.

Given all this, I was thrilled to be invited to the White House on  January 11th to attend a summit on President Obama’s “Insourcing American Jobs” initiative — what, in my IT services and outsourcing world, I would have called a domestic outsourcing summit. You can read about the summit here []. I believe domestic IT outsourcing is a rising trend that has the potential to re-shape the way companies consider IT outsourcing. Domestic outsourcing is just what is implied by the name — the use of US-based resources to perform your IT services needs. The domestic outsourcing model transplants the offshore factory model to the US and uses local, contextually sensitive developers on the software assembly line so that clients do not have to spend so much time and money specifying their requirements in a way that can be interpreted by non-native programmers.

There are three reasons why this trend will be important to American businesses:

  1. Business alignment. Unfortunately, when you look at the offshore factory model, what you find is an almost exclusive focus on the build portion of the software development life cycle. The front end of the life cycle (gathering business requirements and doing analysis) is really left up to the client. As all who have been doing offshore outsourcing know, this process is very expensive and, of course, very time-consuming, and it eliminates the ability for IT to innovate on the behalf of the business.
  2. Time-to-market improvements. Sure, the labor rate is higher, but the total cost of ownership seems to actually be lower — if we can believe all the anecdotal evidence facing us. Having access to cost-effective, high-quality IT professionals in real time will change the speed at which companies can respond to and drive demand.
  3. Political support. Politicians are rallying around domestic outsourcing. Currently, the federal government does not support the IT industry in the US the way the Indian government subsidizes the IT industry in India with things like tax-free export zones. So, Indian vendors have a much lower cost structure, not just because labor is less expensive, but also because they do not have any tax overhead. This means it’s difficult for domestic IT outsourcers to compete with government-subsidized Indian vendors on an even playing field. The Obama administration’s answer, in addition to new federal tax incentives and disincentives and Small Business Administration loan guarantees, seems to be the newly formed SelectUSA program. This program is meant to help companies take advantage of existing federal programs and tax breaks (e.g., the R&D tax credit) as well as state and local subsidies (e.g., the state of Texas’ Texas Enterprise Fund, which gave CGI $1.8 million in subsidies to open a software factory in Belton, TX) in a one-stop-shopping kind of way. Previously, navigating federal tax laws and state and local incentive programs was close to impossible for all but the most persistent entrepreneur. By no means will this program or anything the President promised equal the investments that the Indian government makes in its IT industry, but this visibility will increase this nascent industry’s momentum and speed up supply development and demand generation.

I must say, my unbiased analyst opinion is that IT jobs are coming back here and this transition will be at least as quick as the Indian software vendors’ rise to dominance. To be sure, India will still be part of the global outsourcing model — the big change is that the US will also be the dominant participant in this critical global industry.

Interested in this domestic outsourcing trend? Considering alternatives to India? Please leave a comment, and I’ll try to respond.