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The New Calculus of Offshoring

For years the offshoring boom was driven by one factor: savings. Today the decision is much more complicated.

But contract negotiations don’t simply boil down to 2 years versus 10; in essence, companies want to, as Dupuis puts it, “variable-ize” their costs. That means that the bill will rise in lockstep with demand, and vice versa. A call-center contract, for example, might specify a minimum number of “seats” that can be reset every 45 to 90 days. “If volume collapses, say, 50%, a customer using 500 employees can change the number within a month or two,” notes Dupuis. Contracts now build in volume discounts as demand rises, or require 10% efficiency improvements every year, or establish targets for service levels, availability ratios, uptime/downtime, and other criteria.

Those latter stipulations are often dubbed “outcome-based outsourcing,” an acknowledgment of just how topsy-turvy the industry has become. “It’s not a seller’s market anymore,” says Surjeet Singh, CFO of Patni Computer Services, a provider of global IT services. “The market is such that customers can write [more-customized] contracts. More and more pay-for-performance models are emerging.”

Think Globally and Local

A decade ago, all outsourcing roads seemed to lead to India. Earlier this year, consultancy BDO Seidman asked technology CFOs where they would expand outsourcing if they were planning to do so. The most popular destination? The United States, at 22%. China was runner-up (16%), with India a close third (13%). Meantime, the Philippines, Mexico, Costa Rica, and Jamaica have had recent success in winning high-profile clients.

India remains competitive — after all, outsourcing makes up nearly 6% of GDP and employs 2.2 million workers, and an IT employee who would command $100,000 in the United States costs about a quarter of that in India. Some Indian outsourcers are responding to wage inflation there by shifting work from higher cost cities to emerging centers of commerce.

Find the Right Balance Between Agility, Economy, and Strategy

Something similar is happening in the United States. Companies that have been burned by offshoring, or that are sensitive to claims that shipping jobs overseas is un-American, have an expanding array of options at home. Rural Sourcing Inc., which builds development centers in “Tier 3″ U.S. cities (midsize-to-large cities such as Pittsburgh, Cleveland, and Tampa), says revenues this year will be 300% above last year’s.

While Asian and Indian workers have their own distinct cultural attributes, says CEO Monty Hamilton, Americans do as well. “We tend to push back, apply our own critical thinking, and create closer collaboration to reach the best answer,” he says. Rural Sourcing, which offers IT application development and maintenance, is in the midst of choosing the site for a third location, supplementing centers it has already opened in Jonesboro, Arkansas; and Greenville, North Carolina. “We are the new smokestack companies,” says Hamilton.

Stephen Loynd, program manager in the outsourcing group at IDC, points to a related option: outsourcing to home-based workers, a trend that he says may grow at a rate of about 18% a year over the next five years. He argues that many factors are combining to keep workers home — from the price of gas to concerns about the H1N1 virus (swine flu).

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