US tech companies outsourcing fewer jobs

Professional consulting firm BDO on Tuesday released a survey revealing that for the third consecutive year, US-based technology companies are sending less jobs overseas. The survey polled the CFOs of 100 leading tech companies, of which just 32 percent acknowledged sending manufacturing or services jobs to foreign firms. This is a dramatic departure from 2009, when a clear majority of companies (62 percent) were relying on outsourcing practices.

Paul Heiselmann, a Partner at BDO, explains that “with unemployment numbers still hovering above 8 percent, pressure is mounting from Washington to bring jobs home. The tech industry seems to be moving in that direction, which is good news for US job seekers.”

The rise of outsourcing

In the early 1980’s, tech firms began the process of migrating the relatively low-skilled work of managing data centers to contractors. More specialized jobs, such as engineering and research & development, stayed in-house. This practice saved the companies the expense of running what was by then a core segment of their business, but was not in fact a competitive differentiator — while focusing more of their valuable resources on high-tech and high-skill areas where they could further leverage their strengths. Outsourcing companies such as IBM and EDS  in turn began to benefit from the strong influx of high-tech business, and built enormous data centers to serve the needs of numerous US companies, benefiting from economies of scale. For a time, a sort of equilibrium developed in which US firms could save significant sums of money by contracting out the less strategically important parts of their businesses, while maintaining a highly-educated and well-paid employment base to focus on high-tech innovation and customer service.

In the late 90’s, this trend in tech began to change. The introduction of application service providers (ASP’s) made it possible to outsource core facets of software. Custom in-house development for point of sale systems, database software, and the like became obsolete for all but the largest and most specialized businesses. Brand-new Web companies riding the dot-com wave came to rely heavily on ASP’s. With heaps of venture-capital funding, but little experience and even smaller staffs, ASP’s were the most viable choice for high-tech upstarts. Even larger firms began moving their software and application management off-site, cutting the high-costs of running and developing custom applications.

A cycle for US tech firms emerged in which CEOs began to contract out more and more of their core skills to outside firms, pressured by shareholders and brutal competition. A glaring and persistent example of this trend has been the outsourcing of high-tech customer service departments to overseas call-centers. Even behind the scenes, companies have moved business segments which would have been seen as essential 10 years ago to contracted or overseas firms. In perhaps the most illustrative example in recent memory, HP in 2008 acquired EDS, at that time one of the largest outsourcing companies in the world. In other words, HP, with the acquisition of EDS, effectively outsourced its outsourcing.

Reversing the tide

As consumers have become keener to the social and political ramifications of outsourcing, Heiselmann adds that “bringing services and manufacturing back to the US is also a smart move for tech companies looking to improve the quality of service and reduce exposure to international risks and major supply chain disruptions.” Recent flooding in Thailand, for instance, affected access to high-tech parts such as hard drives.

Other notable findings from the study include a marked decrease in outsourced manufacturing, which became the least outsourced function in 2012 (33 percent), after being the most outsourced in 2011, (53 percent) 2010, (51 percent) and 2009 (54 percent).

Of the 32 percent of companies that did report outsourcing jobs, call center outsourcing increased this year (37 percent vs. 12 percent in 2011).

Also notable: India emerged as the top location for outsourcing, almost doubling the number of companies reportedly outsourcing there since last year (62 percent vs. 33 percent in 2011).

Although this news, coupled with the recent report that the mobile app business has added an estimated 500,000 jobs to the US economy, is undoubtedly an encouraging sign for US job seekers, we’ll have to wait and see if tech companies continue this promising trend.

Image Credit: Mlkshk

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