Outsourcing: the next bubble?

Rebecca Fannin thinks that outsourcing is over-hyped, like tech mania of the 1990's:

How do you know when another bubble is about to burst? The signs of an overinflated tech boom were evident back in the late 1990s but no one paid much attention until it was too late and millions of dollars were sunk in ill-fated ventures. Now another peak and valley are on the horizon—not in Silicon Valley but far away in India, and not among dot-com startups but among providers of outsourcing services, from call centers to software development houses.

According to Fannin, signs of a coming shakeout in the outsourcing industry include venture capital flooding into the Indian tech sector, unsustainable growth rates, competitors luring away top talent from one another, rising hourly rates ($150/hour for some Indian software developers), and outsourcing firms going out of business or being acquired by stronger competitors. Already, many U.S. companies that have outsourced to India are now looking to other locations, such as China.

Why should U.S. executives care whether the outsourcing market is a bubble? The risk is that all the assumptions you've made in the business case for outsourcing may be invalid. The quality of service may become unacceptable. Or, cost savings won't be there. Or, worse, just as you've outsourced your software development, call center, or back office processing to an offshore provider, your partner goes out of business. Of course, bringing it back in-house won't be so simple if you've let go of your internal staff.

Fannin quotes M.R. Rangaswami, who heads the consulting firm Sand Hill Group:

"We are seeing a hyper-market with a lot of consolidations and mergers." He also points to some "quiet failures" among outsourcing providers, which are related to quality service issues rather than excess supply. As one high-profile example of failure due to service issues, he points to a recent decision by Dell to stop routing corporate customers to a technical support call center in Bangalore after it received numerous complaints about thick accents and scripted responses."

So, is the offshore outsourcing trend really a bubble about to burst? Usually, bubbles are only obvious in hindsight. Regardless, companies need consider all aspects of the outsourcing decision--such as loss of flexibility, and risk--not just cost savings.