Mixed results have shown that offshore IT outsourcing — all the rage for the past decade — has over-promised and under-delivered. As our ability to calculate total cost of ownership of offshore outsourcing has advanced, CIOs are beginning to evaluate alternatives, many of which may be better bargains than previously thought.

In 2003, offshore outsourcing’s main selling point was cost. It was the next frontier in cost savings and increased efficiencies in application development and infrastructure support services. Offshoring offered a grand picture of 10-20% savings on labor arbitrage, the ability to focus on core business, and access to an unlimited source of IT experts. While much of this is marginally true, especially relative to short term costs, potential for failure of offshore IT  outsourcing strategies is also high when the approach is shortsighted. As CIOs factor in issues related to regulatory compliance, protection of intellectual property, culture and language differences, political implications (such as stability and espionage) and even time zones into the outsourcing decision, many are considering other tactics.

Nearshoring

India took an early lead as a center for offshore outsourcing, and numerous locations from the Middle East to Eastern Europe are vying to attract outsourced work.  However, nearshoring — or the transfer of IT to a nearby country — is becoming increasingly popular. By partnering with a nearshore solution provider, you can reduce the complexity and risks associated with the distance between a client and a service provider such as travel cost and time-zone differences.  Additionally, as Mexico, Canada and the U.S. are each others’ premier trading partners and have quite a bit of regulatory overlap, nearshore outsourcing can potentially alleviate many compliance-related issues.

Onshore outsourcing

Onshore outsourcing, sometimes referred to as in-shoring, is also on the rise. In an attempt to compete on price, vendors are moving to more rural areas such as Desmoines, Omaha, and Wichita that offer access to cheaper labor due to a lower cost of living. Rural areas are also emerging as better places to house large data centers, as 24X7X365 power takes a tremendous amount of energy to sustain. By partnering with an onshore vendor, you can better ensure that your intellectual property will be protected and legal compliance maintained.

Cloud computing

An emerging alternative to offshore outsourcing may lie in the clouds. As cloud computing and related technologies gain momentum, we’re seeing organizations decrease their need to staff many traditional IT functions. As cloud computing solutions move higher into the stack, businesses are using it to outsource data storage, application, and even entire data centers to third party vendors. The shift results in savings from lower on-premise costs such as electricity and office space, and also less need for as many traditional IT staffers maintaining help desks and managing in-house servers.

The take-away

The admonition against being “penny smart, but pound foolish” is based on the need to exercise wisdom when deciding how to invest resources, evaluating all measures of cost and risk over both the short and long term. While outsourcing is clearly here to stay, in 2011 many CIOs are re-evaluating the benefits of strategies that take IT offshore, and increasingly considering near-shore and onshore outsourcing as well as cloud computing as alternatives with lower total cost of ownership.