A survey of senior IT managers
points to political and legal issues
as the top risk concerns. These
managers also say offshoring can
create more jobs.
G. Reza Djavanshir
Surveying the Risks
and Benefits of
IT Outsourcing
I
n a global economy fueled by advances in
telecommunications and information tech-
nologies, offshore outsourcing is evolving
from conventional international-trade prac-
tices. But rather than simply placing a sales office
in a new overseas region, companies are looking
at all their business activities with an eye toward
retaining some in-house and outsourcing others to
offshore locations.
Historically, IT product development has
occurred within predictable supply chain envi-
ronments. Companies could more easily predict
the success of their strategic goals, along with the
costs, benefits, and risks of their operations (End
of Line: The Rise and Coming Fall of the Global
Corporation, Barry C. Lynn, Doubleday, 2005).
They could then attempt to mitigate risks and
increase the efficiency of their business activities
based on a limited number of factors.
Today, the rules of the game have changed:
Global competition has forced companies to
become more efficient and to strategically repo-
sition themselves within the competitive market-
place. As a result, many have turned to offshore
outsourcing.
PROS AND CONS
Offshore outsourcing offers an attractive ben-
efit in terms of lower labor costs. However, turn-
ing to offshore business partners also involves
challenges in dealing with risks that arise from
the systemic complexity of unpredictable risk fac-
tors (“Vendors Perspectives: Exploring the Value
32 IT Pro November ❘ December 2005 Published by the IEEE Computer Society
Proposition in Information Technology
Outsourcing,” Natalia Levina and Jeanne Ross,
MIS Quarterly, Sep. 2003). So how does an IT
company successfully navigate the risks associ-
ated with offshore outsourcing?
One answer is that IT companies can identify
the benefits and risks of proposed strategies, and
then develop plans to maximize the benefits and
mitigate the anticipated risks.
To better understand the factors involved in off-
shore outsourcing, my colleagues and I wanted to
identify typical benefits and risks, and order them
based on their overall average importance rat-
ings.To obtain this information, we surveyed sen-
ior managers in different IT companies in the US
and Europe, seeking their opinions about the
importance ratings of certain pre-identified risk
and benefit factors in offshore outsourcing. Based
on these survey results, we computed the overall
importance ratings and the rank orderings of the
risk and benefits factors.
RESEARCH METHODOLOGY
To obtain and analyze the information needed
for our study, we designed a questionnaire listing
the main benefits and risks of offshore outsourc-
ing.We asked respondents to rate the importance
of each factor on a scale of 1 to 5—1 meaning not
important at all and 5 being the most important
factor. We sent the questionnaires to 303 senior
managers at IT companies in North America and
Western Europe, along with a cover letter and two
additional follow-up letters.This effort yielded 137
1520-9202/05/$20.00 © 2005 IEEE
responses, out of which only 114 (37.6
percent of the total original popula- Table 1. Overall importance ratings of
tion) provided valid, reliable, and con-
sistent answers. Respondents were offshore outsourcing benefits.
also asked to add any missing factors Importance
that they thought important along Benefit rating*
with their importance ratings, using
the same 1-to-5 scale. Labor cost reduction 4.9
We then performed a statistical Access to the host country’s skilled workforce and talents 4.9
analysis of these responses to compute
the overall average importance rating
Follow-the-sun (24/7) continuous operation 3.7
of each benefit and risk factor. Then, Improved flexibility and agility 3.4
we rank ordered these risk and benefit Taking advantages of host a country’s universities 3.1
factors based on their overall average
importance ratings. * Based on a scale of 1 to 5, 5 being the most important.
Finally, we identified a list of IT jobs
in our questionnaire and asked
respondents to mark the ones that
they anticipated would grow in num-
ber because of offshore outsourcing. Table 2. Decline in R&D spending at
BENEFITS OF OFFSHORE major US technology firms.*
OUTSOURCING R&D spending (percentage of sales)
Respondents to our survey rated
the importance of five benefit factors. Company Previous Current
Then, we rank ordered them based on Cisco 17 14.5
their overall average importance rat-
ings.Table 1 shows the importance rat- Hewlett-Packard 6 4.5
ing, listing each benefit in order of Dell 1.5 <1
importance, from the most important
Lucent Technologies > 15 < 10
to the least.
* Source: “Outsourcing Innovation,” Pete Engardio and Bruce Einhorn, Business Week, 21
Labor cost reduction Mar. 2005.
Offshore outsourcing’s most obvi-
ous and short-term benefits are in
reducing the labor cost, improving
efficiency, and gaining a competitive advantage.According Rev., Nov.-Dec. 1996). Steady access to a talented and
to our survey, IT companies can save up to 40 percent in skilled workforce is also critical to generating innovative
operational expenses when compared to a US-based oper- ideas that improve the company’s competitive advantages.
ation. Other studies also indicate that the cost savings of Recent trends in R&D spending at major technology
offshore outsourcing range from 15 to 40 percent firms underscore the need for access to such a labor pool.As
(Offshoring Information Technology, Erran Carmel and Table 2 shows, major technology companies are spending
Paul Tjia, Cambridge Univ. Press, 2005). This benefit tied significantly less on R&D (“Outsourcing Innovation,” Pete
with a second factor—access to a skilled workforce—as Engardio and Bruce Einhorn, Business Week, 21 Mar. 2005).
the most important benefit. So, to access low-cost but still well-educated talent, many
IT companies are turning to offshore countries for their
Access to the host country’s R&D activities. For example, companies such as Cisco
skilled workforce and talents Systems, Intel, Motorola, and Microsoft have moved some
For an IT company, offshore outsourcing increases access R&D activities outside the US. For example, Microsoft
to a ready and skilled workforce at lower costs (compared now has research centers in Cambridge, UK; Beijing,
to those in North America and Western Europe). This is a China; and Bangalore, India.
very important factor particularly because, in a competi- Respondents to our survey ranked the overall average
tive industry such as IT, success depends on offering prod- importance rating of this factor as 4.9 out of 5; therefore,
ucts and services that are low cost and differentiated we rank it—along with labor cost reduction—as the first
(“What is Strategy?” Michael Porter, Harvard Business benefit of offshore IT outsourcing.

November ❘ December 2005 IT Pro 33

 OUTSOURCING
Table 3. Job categories that will likely
grow in the US and Western Europe as
a result of offshore outsourcing.
Job category
Mission-critical systems security, architecture,
and design
Core products, requirements specifications
Strategic planning
Products’ key performance and functional
specifications
Proprietary hardware and software design
Systems integration
Products’ ergonomics, appearance, and
aesthetics specification
Project management
Direct human interaction with the customers
* Measured in terms of percentage of respondents agreeing that the number of
jobs in the given category will grow.
Follow-the-sun (24/7) continuous operation
Reducing the time it takes to complete a project is an
important objective for all businesses. For IT companies,
follow-the-sun continuous operation means that they can
take advantage of different time zones around the globe to
reduce the time required to complete projects. This
approach improves operational efficiencies, particularly in
areas such as software development, code fixing, prototyp-
ing, and technical supports (“Offshore Outsourcing Basics,”
http://www.ebstrategy.com).For example, in software devel-
opment, software programmers on the US West Coast can
stop work on a job at 5 p.m., Pacific Time, then pass it to
lower-wage programmers in India before the beginning of
their day.The 12 hours time zone difference allows for the
completion of the work by 6 a.m., Pacific time the next day.
In today’s competitive economy, taking advantage of dif-
ferent time zones around the globe has become a popular
way of conducting business within IT companies.
Based on our survey, the benefit of follow-the-sun (24/7)
continuous operation received an overall average impor-
tance rating of 3.7 out of 5, ranking second in importance
of all the offshore outsourcing benefits.
Improved flexibility and agility
In today’s quickly changing IT industry, having a flexi-
34 IT Pro November ❘ December 2005
ble and agile organization, one that is able to
quickly respond to changing markets and cus-
tomer demands, is an important factor for suc-
cess. Offshore outsourcing helps companies
to be flexible and agile by providing a reliable
Likelihood yet adaptable stream of workers to reduce the
of growth time it takes to start and complete projects.
(percentage)* Based on our survey, the overall average
importance rating for this benefit was 3.4 out of
100
5; we therefore ranked it the third most impor-
tant benefit of offshore outsourcing.
100
100 Host country’s universities
For IT companies, host countries with good
95 technical universities not only provide edu-
cated engineers, problem solvers, and innova-
93 tive scientists,they also produce a steady stream
of educated and skilled workers.This is impor-
92
tant because in the US the percentage of stu-
81 dents graduating with degrees in engineering is
now less than 10 percent (Science and Engineering
52 Indicators 2004, Nat’l Science Foundation, 2004;
http://nsf.gov/statistics/seind04/ pdf/c02.pdf).
43 In today’s competitive IT industry, a company’s
core competencies depend, in large part, on the
supply of a skilled and talented technical staff.
Universities in a host country can also pro-
vide additional training for offshore staff, if
necessary.
Based on our survey, this factor received an overall aver-
age importance rating of 3.1 out of 5, ranking fourth in
importance.
IT job growth in North America
and Western Europe
From the viewpoint of IT workers in North America and
Western Europe, offshore outsourcing might appear to be
a no-win situation. However, history shows that jobs lost in
one area are replaced by new jobs (The Black Book of
Outsourcing, Douglas Brown and Scott Wilson, John Wiley
& Sons, 2005).
According to Cypress Semiconductor CEO T.J. Rodgers,
the US Department of Labor projects job loss in IT to be
31 million by 2015.At the same time, the economy will cre-
ate 32.8 million jobs, for a net increase of 1.8 million jobs
(“The Truth about Outsourcing,” T.J. Rodgers, IEEE
Design & Test of Computers, Jan.-Feb. 2005).Additionally,
a comprehensive study conducted by economist Katherine
Mann in 2003 found that the projected growth rate in IT
occupations will be 43 percent by 2015, compared with the
entire economy’s overall job growth rate of 13 percent
(Globalization of IT Services and White Collar Jobs: The Next
Wave of Productivity Growth, PBO 3-11, Inst. for Int’l Economics,
2003; http://www.iie.com/publications/pb/pb03-11.pdf).
 In a study conducted by Jadish Figure 1. Overall impact of offshore
Bhagwati and Arvind Panagariya of it outsourcing on the US economy
Columbia University,and T.N.Srinivasan
of Yale University,the authors quote Lori
and the IT industry.
Kletzer, a University of California 700,000
researcher,as writing that the majority of Jobs (IT and non-IT) created
600,000 IT software and services jobs lost
those who lost jobs because of offshoring
found reemployment within two years. 500,000

No. of jobs
Furthermore,roughly half of these reem-
400,000
ployed workers ended up finding jobs
that paid as much or more than their pre- 300,000
vious jobs. The other half experienced
200,000
wage cuts of at least 15 percent (“The
Muddles Over Outsourcing,” J. 100,000
Economic Perspectives, Fall 2004;
0
http://www.columbia.edu/~ap2231/Policy 2000 2002 2004 2006 2008
%20Papers/JEP_Outsourcing_Final. Year
pdf). Interestingly, our respondents
believed that offshore outsourcing will
result in growth in the IT jobs listed in Table 3.
A study conducted by Global Insight Inc. and sponsored
Table 4. Overall importance rat-
by the Information Technology Association of America
found that the US economy created about 194,000 new IT ings of offshore outsourcing
and non-IT jobs in 2003. The same study projected that risks.
the number of jobs created by increased economic activ-
ity will reach 589,000 jobs by 2008 (The Impact of Offshore Importance
IT Software and Services Outsourcing on the U.S. Economy Risk rating*
and the IT Industry, Global Insight, 2004). Figure 1 plots Political 4.8
these opposing trends of job loss and creation.
Legal, enforcement of intellectual property
rights and business contracts 4.6
RISKS OF OFFSHORE OUTSOURCING
Any business plan carries risks because the future is Information vulnerability and security 4.5
always uncertain. In today’s global environment, offshore Immature business environment 4.3
outsourcing exposes firms to various risks in host coun-
tries. However, these risks should not prevent companies Socio-cultural problems 4.1
from engaging in offshore outsourcing if their strategies * Based on a scale of 1 to 5, 5 being the most important.
anticipate the possible risk factors and include risk miti-
gation plans.This means that by identifying risks, and col-
lecting and assessing information about them, companies
can use accurate assumptions in their strategies and ations. In some developing countries, government rules
become more proactive in mitigating and offsetting and policies can change suddenly (and sometimes arbi-
adverse outcomes. trarily) based on individual decisions by heads of state.To
Respondents to our survey rated the importance of the mitigate this risk, researcher Barry C. Lynn, a fellow at the
five risk factors in Table 4. New American Foundation, a public policy institute, sug-
gests that companies should diversify their business activ-
Political risk ities among different countries.
This risk relates to the political situation in a host coun- Our survey’s respondents ranked this factor as the most
try. Offshore outsourcing exposes companies to risks from important risk in offshore outsourcing.
political unrest and instability, wars, confiscations, nation-
alizations, and terrorism.These are in addition to the host Legal risk
country’s governmental policies, regulations, and attitudes This risk factor relates to political risk because political
toward foreign businesses. unrest can lead to weak enforcement of the rule of law or
Political risk can have cost impacts on companies the absence of an independent judicial system (State
because of interruptions in the continuity of business oper- Building: Governance and World Order in 21st Century,

November ❘ December 2005 IT Pro 35

 OUTSOURCING

Francis Fukuyama, Cornell Univ. Press, 2004). In these ness and customers secret; doing so is part of expected
types of countries, resolving legal disputes often become business norms. Such is not the case in some countries,
time consuming, costly, and subject to corruption.This risk however.
can thus expose companies to a host of adverse situations, At any rate, it is the legal, ethical, and business respon-
including loss of intellectual property rights, propitiatory sibility of IT companies engaged in offshore outsourcing
design features, piracy, and trademark infringements. to pay close attention to the vulnerability and security of
For example, an ex-employee of an offshore vendor tried their internal and customer data.As Table 4 shows, our sur-
to sell an IT company’s proprietary and secret information vey respondents considered this risk very important, giv-
to a competitor because the country had no strong law ing it an overall average importance rating of 4.3.
enforcement mechanism to protect the company’s rights Therefore, IT companies, before engaging in offshore
(Sayan Chatterjee, 2005, Failsafe Strategies, Wharton outsourcing in any country, should study the candidate
School Publishing). country’s track record in protecting foreign businesses
In some countries, intellectual-property law can also be from information security problems. They should analyze
biased toward protecting a local company at the expense its piracy, information disclosure, and information security
of a foreign one. protection laws.
For these reasons, Richard Outsourcing companies
Heeks, a prominent offshore out- Immature business
sourcing strategist, calls the exis-
should pay close environment
tence of intellectual-property laws, attention to the Immaturity of the business envi-
along with their enforcements, an ronment manifests itself in various
essential prerequisite for foreign
experiences of other dimensions, including volatile
investment in a country (Software companies doing exchange rates, weak national cur-
Strategies in Developing Countries, rencies, high tax rates on foreign
working paper no. 6, Inst. for business in that companies, high tariffs on imports
Development Policy and country. and exports, rigid customs laws,
Management, 1999: http://unpan1. and regulations that discourage
un.org/intradoc/groups/public/doc- foreign business. An immature
uments/NISPAcee/UNPAN015540.pdf). business environment can result from a regulated econ-
In our survey, the overall average importance rating of omy and protectionism (“Changes in National
this risk factor is 4.6, making it the second most critical fac- Technological Competitiveness: 1990, 1993, 1996, and
tor. To mitigate this risk, IT companies must obtain the 1999,” Alan Porter and colleagues, Technology Analysis
candidate country’s track record on intellectual-property and Strategic Management, 1 Dec. 2001).
protection and verify to what extent the country will pro- Technological infrastructure can also be lacking in such
tect business interests. Outsourcing companies should also an environment. Countries without cost effective and reli-
pay close attention to the experiences of other companies able broadband telecommunications infrastructure, for
doing business in that country. example, can be difficult places in which to conduct busi-
ness.
Information vulnerability and security Another manifestation of an immature business envi-
Offshore outsourcing exposes companies to information ronment is the lack of adherence to modern business stan-
vulnerability and security risks that can result from a lack dards and processes. Developing products in such a
of regulation. In some countries, such risks can be the con- country can result in poor-quality designs because IT ven-
sequences of poor or different work ethics. dors do not stay up to date with current and emerging tech-
For example, some Asian countries permit the sharing nologies. Some countries do not follow business practices
of copyrighted software, a practice that is illegal in the US such as the Capability Maturity Model and ISO 9000 stan-
and other industrialized nations (“Risk Factors Associated dards.
with Offshore IT Outsourcing,” M.H.A. Tafti, Industrial In today’s global and integrated economy, a country with
Management and Data Systems, May 2005). difficult visa and immigration requirements not only makes
In another example, a host-country employee of a com- business travel difficult, it can also slow down the interna-
pany attempted to sell its patent information to another tional flow of talent and skilled labor.
company (Offshoring Information Technology: Sourcing Business maturity, on the other hand, can come from
and Outsourcing to a Global Workforce, Carmel and Tjia, world-class institutions and a government vision that con-
Cambridge Univ. Press, 2005). tinually creates, fosters, and sustains all the factors needed
Data vulnerability and security has always been a criti- to remain competitive and attract foreign business. In
cal factor in conducting business. In most industrialized today’s competitive economy, all companies must study
countries, companies try to keep information on their busi- and analyze the business conditions in the candidate coun-

36 IT Pro November ❘ December 2005

try to make sure that the business environment is mature.
Look for public policies that support an open-market
economy without high tax and tariff burdens; business
friendly and supportive government laws and regulations;
and a modern and reliable infrastructure, including the
presence of technology parks.
In our survey, this risk factor received an overall aver-
age importance of 4.3, making it the fourth most impor-
tant risk factor in offshore outsourcing.
Socio-cultural problems
Cultural differences can cause the misinterpretation of
business conversations and professional behaviors. The
national orientation of the people toward foreign busi-
nesses is an important factor that companies must account
for in considering where to outsource. Countries with a
population that lacks an entrepreneurial spirit and propen-
sity to excel won’t fare well in the competitive global econ-
omy. Governments that lack a business friendly vision
toward foreign companies can pose potential risks to any
company trying to engage in business activities. In some
countries, special interest groups such as student organi-
zations, trade unions, or religious organizations might want
to obstruct a foreign company’s business activities; this
obstruction can also become a source of risk.
To avoid socio-cultural risks, management should visit
the candidate outsourcing country. They must also study
the country’s socio-cultural values, norms, and beliefs.
Respondents rated this risk factor at 4.1 out of 5 points
possible.
M
ost companies consider offshore outsourcing as a
way to reduce costs and increase efficiencies.
Outsourcing can be a viable option for companies
and can also help businesses and economies in the coun-
tries involved, as long as the outsourcing company objec-
tively identifies and analyzes the benefits and risks. ■
G. Reza Djavanshir is an assistant professor of information
technology in the Graduate Division of Business and
Management at Johns Hopkins University. Contact him at
jr@jhu.edu.
For further information on this or any other computing
topic, visit our Digital Library at http://www.computer.org/
publications/dlib.
November ❘ December 2005 IT Pro 37