I've been doing some research lately on offshore outsourcing (which is simply teleworking across an ocean or two). It left me with a simple question. Could on-shore outsourcing from an expensive area like Northern Virginia to an area with lower cost of living be a better deal than offshoring to, for example, Bangalore, India? 

For a quick analysis of salaries for different areas, I went to salaryexpert.com. A software engineer would make, on average, $71,188 in Northern Virginia (I used compensations w/o benefits and bonuses for this exercise).

According to the Meta Group, realistic cost savings for outsourcing are in the range of 15-20%. Assuming a 20% savings, you'd expect to get this service for a total cost of $56,950 via offshore outsourcing. Salaryexpert.com says a software engineer in Bangalore, India would make $26,171. The hidden costs* add up to $54,279! (At 15%, the total cost to outsource is $60,510, so hidden costs are only $34,339.)

*Hidden costs were explored last September by CIO Magazine, and include costs related to vendor selection, transitioning the work, layoffs and retention, lost productivity/cultural issues, improving development processes, & managing the contract. All apply of these apply to both on-shore and off-shore outsourcing, but will vary in part based on physical and cultural distances between outsourcing buyers and providers.

Again from salaryexpert.com, a software engineer would make $51,670 in Eastern Kentucky. That's a better deal than outsourcing on the surface, but there are hidden costs for onshore outsourcing, too. How would they compare to those for offshore outsourcing? Could they possibly be less than $5,280 ($56,950 - $51,670)? Maybe not, but could they be close enough to make outsourcing a better decision for certain types of work? According to DaimondCluster's 2004 Global IT Outsourcing Study, "Today...buyers have higher expectations of offshore services because they feel that the services that are being sourced offshore are more structured and commoditized and therefore less likely to have problems." 

A Gartner analyst cites rising salaries in India due to increased demand from the likes of Accenture, EDS, and IBM Global Services. This could change the math dramatically in favor of onshoring.

And what's the US to do? How about following the outsourcing leader? From the previous article: "Meanwhile, Indian services companies are investing heavily in their own IT and communication infrastructure, which has become the lifeline of the Indian outsourcing industry."

2:20:24 PM    
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