Should I Stay or Should I Go?
Sending jobs offshore to countries like India seemed like a sure bet. Now, some firms are having second thoughts.
Offshore for sure? Businesses are thinking twice about taking the outsourcing plunge
By Brad Stone

April 19 issue - Wesley Bertch admits he fell for offshore outsourcing "hook, line and sinker." So when Bertch, chief techie for Minneapolis-based Life Time Fitness, a health club chain, needed software to evaluate potential new locations for gyms late last year, he looked overseas where he could pay $6 an hour instead of $60 for programmers. He hired a large, reputable Indian outsourcing firm a few months ago, then sat back and watched his troubles mount. Not only did the offshore team produce code that was full of bugs, they ran up big bills working overtime to fix their mistakes. Bertch finally canned the offshore contractors, hired several local programmers and started preaching to industry colleagues that managing such projects across oceans is doomed to failure. His biggest surprise? "I've since talked to scores of my peers, and we are all singing from the same hymn book," Bertch says.

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Until recently, sending jobs overseas seemed like a bulletproof business strategy. By outsourcing routine tech and customer-service jobs to educated, eager workers in countries like India and the Philippines, companies sharply cut costs—savings that outweighed the inevitable negative publicity. The movement has gained such momentum that it's become a big election issue, with candidates sparring over "Benedict Arnold CEOs" and how best to keep jobs in the United States. But many American companies are discovering that sending work to low-wage countries is not as easy or as inexpensive as advertised. In hotspots like Bangalore, wages and real-estate prices are soaring to record levels—though still generally a fraction of U.S. costs—which cuts into potential savings. As U.S. companies move from exporting call centers to outsourcing more complex work like software development, they're finding overseas workers are often ill-equipped to deliver consistent, quality work. The bad experiences are creating a boomerang effect—the return of jobs to the United States—which some have dubbed "onshoring." Analysts at research firm Gartner have declared 2004 the start of the "trough of disillusionment" with offshoring.


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March 5: Outsourcing of jobs overseas can be painful for people losing those jobs. But economists say the long-term effect could be more U.S. jobs. NBC's Andrea Mitchell reports.

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Even with the growing disenchantment, the outsourcing movement won't disappear. IDC Research maintains that offshore spending will quadruple by 2007 as the world's economy becomes increasingly globalized. What is clear is that more and more companies and onetime offshoring advocates are having second thoughts. Rising costs are just one contributing factor. Inside the largest outsourcing firms in Bangalore, up to 40 percent of workers leave each year, lured away by the promise of higher salaries and easier commutes at new jobs. Americans with their "California tans and Silicon Valley Blackberries strapped to their belts'' are routinely charged the highest office rents, says Ravi Chiruvolu of Silicon Valley-based Charter Venture Capital, which helps start-ups locate some offices in low-wage countries. Chiruvolu says he now preaches caution: "I have a lot of doubts about outsourcing I didn't have two years ago."


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In recent months, some big-name companies have lent credence to those concerns. In December investment bank Lehman Brothers yanked back a 20-person help desk set up to solve computer problems for its U.S. workers, citing the need for quick, on-site responses. Last month credit-card firm Capital One pulled out of a contract with a 250-person call center in New Delhi, after workers were caught promising unauthorized lines of credit to potential customers to boost sales. Dell, hearing complaints of thick accents and poor service from customers who were patched through to one Indian tech-support center, has also relocated that office to the United States. The firms each say they are committed to keeping other operations overseas, though. Frances Karamouzis, an analyst at Gartner Research, says the return trips often have more to do with the poor communication and organization on this shore. "Companies are focusing on relentless cost-cutting and are offshoring their problems rather than finding a true business solution."

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So how will U.S. companies control the costs of their offshoring ventures while maintaining quality and tight managerial control? IBM found one answer last week, paying more than $160 million to buy Daksh, one of India's largest technology-services companies, with 6,000 employees. Experts say U.S. companies may also have to lower their expectations about the types of tasks workers overseas can do well. G.V. Dasarthi, a mechanical engineer in India, says that developing new technologies is not yet his country's specialty. He recently wrote an online article arguing that there isn't much support for innovation or creative thinking in India. Its genuine technology prowess, he says, "is being drowned out in the hype that surrounds the outsourcing industry." The hype in the U.S. may die down as more companies figure out what work they can send overseas, and how to manage it from afar. In the meantime, the real innovation seems to be in finding new ways to sell it to an uneasy public. The latest term making its way through corporate America: "right-shoring.''