According to X-Files investigator Fox Mulder, "The truth is out there." In the IT world, it appears, "the truth is outsourced." Whether it's outsourcing of operations, outsourcing of services, or outsourcing of commercial software development, the O-word today is unleashing strong and conflicting opinions.

For some, outsourcing promises a brave new world of productivity and profitability, while to others it looms as the alien abduction of intellectual capital, jobs, and American prosperity. Even Presidential candidates have seized on the issue, though so far their proscriptions have contributed more heat than light. Much appears to be at stake and much is in flux, so we need to examine the issue more closely.

Rewriting the Cost/Benefit Equation
Large U.S. companies - particularly those in financial services - have been moving their computerized call center, transaction processing, and order fulfillment operations offshore over the past decade in lockstep with the spread of Internet adoption and broadband communications infrastructure.

Since operational databases must be managed, networks maintained, and users supported wherever they are, IT services are flowing in the same outward direction as basic front-end computer jobs. Forrester Research predicts that 472,000 U.S. computer jobs will move overseas by 2015, compared with 27,000 in 20000, while IDC predicts that 23% of all IT service jobs for U.S.-based companies will move offshore by 2007, compared with 5% last year.

Nothing is going to stop this trend, because the motivation behind it - expanding the customer base while containing operational cost - is central to the corporate raison d'etre. And let us never forget that while many Fortune 500 corporations are headquartered in the U.S., their value chain of customers, investors, partners, and suppliers - and therefore their deepest loyalty - is global in nature.

Thus, the argument is already lost that a U.S.-based corporation should for patriotic reasons continue to pay an American programmer several times what it could pay his or her counterpart in Pakistan or India. The plus side, at least for a humanitarian economist, is that the collective power of the offshore IT workforce eventually will express itself as a better standard of living, with salaries and benefits falling somewhere in the range that American IT professionals once were accustomed to enjoy. But that won't necessarily bring any of those internal IT jobs back to our shores; in fact, it's far more likely that the outsourcing wave simply will move on to parts of the world where high-tech is even lower-wage.

What's 'Ours' and What's 'Theirs'?
For managers and employees of small to mid-sized U.S. software companies, outsourcing has taken reverse twists that make many wish they had studied accounting rather than computer science.

First, ambitious and cleverly-managed foreign software firms open operations in the U.S. and “import” top-grade professionals from their home countries, taking advantage of the H-1B and other visa programs created to help U.S. companies hire skilled workers from abroad and keep them here for years at a time. Once here, these professionals – working at relatively low salaries – help their offshore-based employers compete effectively for a share of the U.S. software market.

Second, established and cleverly-managed U.S. software companies move their research and development activities overseas, using Internet-based collaboration to develop cutting-edge products at low cost, and allowing them to maintain their market dominance.

In both cases, the result is tougher sledding for younger U.S. firms trying to gain market share through innovation and perseverance.

Software industry spokespeople warn that offshoring R&D; could backfire by allowing intellectual capital to flow out of U.S. companies. Their fears are not baseless: it's only a matter of time before those brilliant offshore developers decide to turn entrepreneur – such is the whole history of the software industry. Further, the threat of piracy is always present in global machinations of this kind. Serious security concerns also arise if we consider the fundamental role that software now plays in our private and public lives, whether it's delivering the right dosage of prescription medicine or orchestrating the movements of a Mars Rover.

Still, it's unrealistic to expect that protectionist policies by the U.S. government alone will turn the tide. If ever there is to be a time for the software industry to find a global voice on product development and licensing standards, that time is now.

Quality of Service: The Critical Difference
To repeat the adage that the U.S. is moving to a service economy is – for some – to conjure the image of a downsized software developer wielding a bar-code scanner at a local Wal-Mart. Let's try to brighten up that gloomy picture.

In our preferred future scenario, IT services evolves from a stepchild of data processing into a broad and inclusive industry in which application management, business process management, content delivery, consulting, and database and storage management all work together under a single service brand. Customer loyalty to that service brand is reinforced by quality-of-service agreements based on performance levels that are tied to quantifiable business objectives. Some large and small firms have already seen this picture and are busy painting themselves into that future.

IBM is a company that seems to have it both ways with regard to outsourcing. It is a bulwark of the U.S. computer industry and the same time a global player that garners more than half its revenue outside the U.S. It champions improved IT training for U.S. workers while signing up offshore partners when it is economically and logistically advantageous to do so.

Maintaining its dominance, however, depends on the company winning a very large wager: that it can itself become primarily an IT services outsourcing company in the next two to three years. That is essentially the strategy that IBM executives have shared in analyst briefings over the past several months. It is based on the belief that their corporate clients' cost pressures, integration issues, and need for reliable customer-facing technology will continue to drive up the value of IT service outsourcing as it drives down the cash value of off-the-shelf software and hardware.

IBM may not be quite the pirouetting pachyderm portrayed in ex-CEO Louis Gerstner's business best-seller, but along with its surprising agility, it is certainly a mammoth company that may be best suited to serving large and very large customers. The market for IT outsourcing to small and mid-sized organizations will remain largely the territory of companies like SureBridge Inc. of Lexington, MA, which has a strategic trajectory very much like IBM's even though its annual revenue is but a tiny fraction of Big Blue's $89 billion.

SureBridge started out by offering hosting and application management, and then developed a repertoire of industry-specific services, leveraging along the way partnerships with outsourcing companies – some of them offshore – that specialize in supporting horizontal applications such as ERP. “What we find is that once we gain penetration in one application sphere, there is impetus to have us take over more of the IT infrastructure,” says SureBridge CEO Peter Boni. “Outsourcing for the mid-market is cost driven, but also activity-driven: [customers here] need certain capabilities to compete, but they can't do it all themselves. We're embracing a trend by focusing on our customers' success in their strategic business.”

Looking ahead, we see nothing inherently sinister in the future of outsourcing, provided that service remains the focus. There's plenty of room in the IT service economy for small innovators and market makers alike, commodity technologies and advanced collaborative tools, global partnerships, and shared standards. And in this marketplace, American companies are poised to keeping competing – and winning – for years to come. Contact Us for More

Note to readers: If outsourcing is an issue of particular interest to you, consider attending a special panel on the subject at the upcoming AIIM Conference & Exposition in New York. “Winning Strategies for Business Process Outsourcing” will be hosted by Kinetic Information president and Conference Committee member Steve Weissman, and will feature several in-the-trenches perspectives. For information about the show, which will run March 8-10 and will take place at the Javits Convention Center, please visit www.aiim2004.com.