With the financial crisis upon us and a troubled economic period in store for the medium-term, higher unemployment, a weak dollar and lower labor costs are combining to increase the attractiveness of low-cost U.S. locations for global services. We have already seen leading offshore service providers significantly bolstering their onshore U.S. presence, with, for example, TCS establishing a major service delivery facility in Cincinnati, Infosys in New Jersey, Wipro in Atlanta and Cognizant in Phoenix. Offshore services must be augmented with customer-facing onshore services, however, with the onshore costs lowering and new (potential) government policies to encourage the U.S. business to keep jobs stateside, we could see the U.S. emerge as a highly attractive sourcing location for global services providers.

What is clear, is that shipping jobs offshore isn’t necessarily very good for  the U.S. unemployment rate — the age-old argument of focusing U.S. staff on “higher-value” work is wearing a bit thin these days. What’s more, many offshore service providers are now focused on taking on more higher-value work activities for their customers, in addition to routine transaction work. For example, once you have your general ledger run from a service provider in, say Chennai, what is now stopping that provider taking on higher-value accounting services, such as budgeting/forecasting and business intelligence? That provider basically owns and understands much of the revenue cycle of that customer, hence, the natural next step is to move up the process value chain. And if your current provider won’t move up the value-chain, there is a proliferation of knowledge-process outsourcing providers willing and ready to take on higher-value offshore work. Moreover, while a firm may have been enjoying good quality COBOL programming from Brazil, what’s stopping that provider from offering systems architecture work to their customers, which is among the costliest onshore IT services?

We’ve now been sucked into a global employment war for sourcing services, and from what Sen. Obama has stated last month, he intends to give the U.S. firms tax-breaks to source work onshore. While he hasn’t yet outlined exactly how he plans to do this, it is likely that he initially plans to provide benefits to customers, as opposed to  providers, to source work to onshore U.S. locations. This is the opposite strategy of the Indian government’s STPI (Software Technology Parks of India) tax scheme, which gives tax-breaks to new Indian organizations (mainly providers) in the region of 10 to 20 percent during their first 10 years of inception, designed primarily to bolster its software industry, but also directly applies to its service providers.

Look at it this way, you can hire staff in low-cost U.S. locations for as low as $25,000 a year for back-office administrative work. If you can reduce that further, to $22,000 a year as a result of tax incentives, and the cost of health-care is reduced/subsidized, the price differential with locations such as Latin America and India is minimal. IT, on the other hand, is significantly cheaper in locations such as India and China for all levels of services.

Here's My Take
For Business Process Outsourcing (BPO) services, the U.S. is still in the game. The issues surrounding customer/employee contract still favors onshore services (even though offshore services are improving by the day), plus the fact that there is still a great supply of midlevel executives who will be anxious to keep their jobs in the forthcoming months. With significant incentives to keep work onshore, I can see the U.S. stepping up as a serious BPO location. Not a bad thing for the BPO industry, as long as the service providers invest wisely in attaining the right onshore/offshore balance within their delivery infrastructures. Moreover, the onus on sourcing we’re going to see from restructuring financial services industry is going to entail a delicate balance of onshore/offshore BPO work. If the major financial-services firms struggle to sell off their Indian captives, several of them may scale-down their offshore dependence and alternatively seek onshore services.

For IT services, it’s looking a bit late to pull much of this back. In India, for example, IT services have become the life-blood of the country’s economy, and the skills in basic programming are widely available for mainstream applications. Even if the U.S. wage rates for programming work come down significantly, there is also a major issue with the fact that the quality of many IT services delivered from offshore locations is now consistent. The core battle is with services needed from business-process architects and staff with deep industry-specific expertise. We have seen many of the leading offshore providers invest in their onshore deliver centers over the last year — and we can expect to see continued significant competition between the incumbents and offshore providers in the coming months for onshore-related work.  

Phil is Research Director, Global Services and Outsourcing, for leading industry analyst AMR Research, Inc. He also authors the popular blog “Horses for Sources” which can be accessed at
http://www.fersht.typepad.com