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Drawbacks of Software/IT Outsourcing

by: Sarah Joson

Thursday, May 3, 2012 | Outsourcing News |

Cost reduction has been a major reason businesses outsource to offshore locations where labor and operational costs are relatively lower. One segment that thrives in an outsourcing-fuelled environment is software development. It is one of the most expensive segments to cover and putting cost issues aside, outsourcing software-related services and products provides more leg room for executives to easily manage their operations.

However, as time passed and software outsourcing matured rapidly, the software activity is seen to be slowing down as more and more factors are starting to affect the activities of providers vs. clients, providers vs. providers, providers vs. Technology, and many more.

In an article published at SeekingAlpha.com, one of the contributors shared five reasons it may not be a good idea to outsource software-related processes.

Labor arbitrage doesn’t carry as much value as it used to. Before, the salaries of workers in Western countries are known to be triple the value of their Asian counterparts, which is why moving jobs to Asian regions became popular. Now, low labor costs are no longer the main factor in software deals. Large profit margins are pushed aside and the quality and quantity of output are now strongly considered in contracts.

Risks become shared in supplier-client relationships. It became more and more evident that actions, whether good or bad and done by either party, will have a certain effect on one’s image.

Big players are gradually entering the arena. Other titans such as IBM and HP are expanding service offerings and are now tapping the consulting arena. Apart from presenting a complete roadmap to clients, they also offer lower labor costs. On the other hand, companies like Accenture (ACN) are an end to end provider covering management and technical consulting, a sterner competitor that also has global authority.

Salary issues. The salaries of offshore programmers continue to increase, while the US-based employees only get pay cuts. At some point, wages become no longer an issue since both options present similar rates.  

Lousy profits despite extra efforts.  It became apparent during this year’s first quarter performance based on earnings that outsourcing does not deliver as much as it used to. Infosys did ok, while IBM and Accenture gain traction, thanks to the right combination of product offerings and consultancy services.

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