But there are still strong incentives to outsource. According to a recent Forrester Research report, offshore customers save an average of 25 percent on IT projects sent overseas, where qualified, skilled labor is plentiful — and cheap. Industry analysts believe this ROI will help to outweigh security concerns as IT budgets continue to tighten in 2002.

But the decision to outsource is much harder today than it was a year ago. Many CIOs are opting for “nearshore” outsourcing with firms in more stable countries such as Ireland and New Zealand. Not only are these regions more stable politically, but the language barrier is not an issue. Both of these countries have initiated programs to help evolve their outsourcing capabilities.

CIOs who currently have outsourcing deals are, for the most part, not breaking those deals. They are, however, being much more careful by creating disaster recovery plans and keeping current copies of all source codes in the U.S. For companies just embarking on an outsourcing strategy, such security measures are essential. In many cases, having a comprehensive back-up plan is the only way nervous management will buy in.

For those companies that are outsourcing, what tasks are they turning over? According to Metricnet’s (www.metricnet.com) latest survey results, the primary task being outsourced is applications development, followed by applications maintenance, data centers, help desks, business processes, and finally, network management. The results of our survey indicate that the participants outsourcing the above tasks are as seen in Figure 1.

Applications development, whether comprehensive or just a single application, accounts for nearly half of all outsourcing, with maintenance a distant second. Respondent companies spend over half of their IT budget on new development and maintenance, so it’s not surprising that they are looking for ways to save money.

The outsourcing trends over the last five years mirror the results this year. We have seen an increase in offshore outsourcing of application development and maintenance, with a corresponding decrease in help desk, network management and data center operations.

Most companies choose U.S. outsourcing options for infrastructure. English-speaking personnel is essential for help desk and data center, and infrastructure is one thing most companies do not want to have supported halfway around the world. Given these trends, it is likely that most CIOs will continue to view offshore outsourcing firms as alternatives for applications development and maintenance, but not so much for infrastructure.

India continues to be on top of the IT outsourcing market. The number of technical professionals in India is growing and now totals upwards of 4.5 million. The nation’s language (English), educational system (Indian Institute of Technology in addition to 1,900 educational and polytechnic institutions) and superior IT training programs have propelled it into its current prominent position. But even India is feeling the pinch of current conditions. Over the past two years its offshore outsourcing industry was experiencing a 50 percent annual growth rate. This has been decreasing since September 11, and is now more in the 25 to 30 percent range.

Ireland, New Zealand, Hungary, Russia and several Asian countries such as Singapore, Korea, Indonesia, China, Malaysia and the Philippines also provide outsourcing services. Even some Middle-eastern nations, particularly Dubai and its Internet City, provide such services as well. The outsourcing industries in all of these countries have been affected by the current political and economic situation. Many outsource providers are dealing with this challenge with aggressive marketing, touting the usual advantages of outsourcing along with security services that they will provide for their clients.

It has been interesting to watch the global scenario unfold over the last three years. During 1999 and 2000 the primary outsourcing countries lost many of their IT professionals to the U.S. and other developed nations (the “brain drain” phenomenon).

Thanks to H-1B visas, higher standards of living, better quality of life, and salaries up to nine times greater than those offered at home, many developing nations lost much of their highly trained work force to other countries and found themselves in their own labor crunch. In China, for instance, the internal competition for their IT labor force has become fierce over the last several years; still, more and more graduates were enticed by the high salaries and the promises of immigration and eventual citizenship in western nations.

With the economic recession and current global climate, this crunch has lessened considerably in 2001-2002. China and India are experiencing a form of “reverse brain drain” by individuals returning home, disillusioned by H-1B visas and dreams that did not pan out. This is good news for their home countries’ outsourcing industry.

All indications are that IT budgets will remain tight in 2002. With strong outsourcing options available around the world, many CIOs are cautiously taking advantage of offshore and nearshore outsourcing to offset this lack of funding.

Howard Rubin is executive vice-president and research fellow of META Group and founder of Metricnet.

Margaret Johnson is a faculty member in the department of computer science at Stanford University and executive vice-president of Metricnet.

Susan Iventosch is a senior researcher and analyst with Metricnet and vice president of Strategic Sales Corporation.
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