But risks are minimized when the parties share related cultures and industries.

Results from Affiliated Computer Services, recently acquired by Xerox for $6.4 billion, will today provide a signal of performance in the IT outsourcing sector. IT outsourcing to foreign vendors (IT offshoring) has seen tremendous growth in the past decade. Several recent large-scale acquisitions foretell fast growth in the sector. However, for all parties to these transactions, familiarity with associated risks is crucial.

Uneven performance. Recent studies suggest too much enthusiasm and too little caution in mainstream depictions of the industry. A survey of Fortune 500 companies found that 50% of companies reported that they regularly encountered multiple problems per month. A different survey found that 25% of all offshore outsourcing ventures failed to generate expected costs savings; another 25% actually led to increased costs relative to comparable in-house performance. Fully 30% of ventures were eventually judged failures and the contracts either canceled or not renewed

Risks factors. IT offshoring risks fall into three broad areas:

• Operations. As in any contractual relationship, there is quality-of-service risk. Many offshore sites are characterized by high rates of employee turnover. Vendors may also take advantage of poorly worded contracts or lack of technical knowledge at the client firm.
• Cost. IT offshoring may entail hidden costs, including international travel expenses, monitoring and investigation, and developing infrastructure to support off-site operations.
• Security. Intellectual property theft and data security constitute serious risks. In surveys of clients, these are ranked as top factors when selecting an outsourcing vendor, higher even than terrorism and cost overruns.

International laws. Neither the World Intellectual Property Organization nor the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights is viewed as providing adequate protection. A 2005 Booz Allen survey of U.S. executives revealed that China and South American countries were rated the most risky locales (only 5% of respondents reported confidence in their regulatory systems). India inspired the most confidence with a 30% positive rating.

Industry initiatives. In the absence of adequate international outsourcing governance, industry actors are establishing their own frameworks and standards:

• Dupont ( DD – news – people ) and IBM ( IBM – news – people ) have pioneered best-practice frameworks for IT outsourcing contracts.
• The Software Engineering Institute at Carnegie Mellon University certifies companies based on their adherence to a framework of best practices, known as the capability maturing model integration.

Risk mitigation. IT outsourcing relationships characterized by proximity and trust, as opposed to distance and mistrust, have the greatest chance of success. Risk is minimized in accordance with:

• Cultural similarity. This can be due to historical factors (such as a pattern of trade or even colonization), current migration between the two countries, or a common language. This principle is illustrated by the heavy reliance of Filipino firms upon U.S. clients; as well as the preference of U.K. firms for Indian vendors.
• Industrial relatedness. IT outsourcing arrangements between firms in similar industries consistently achieve the highest success ratings. Vendor and client firms share a technical language, and are familiar with one another’s organizational practices.

Outlook. The business process outsourcing sector will continue rapid growth as the global economy recovers from recession. However, businesses will become increasingly sophisticated at evaluating risks associated with IT offshoring. A combination of international regulations and industry certification programs should mitigate the biggest risks, namely intellectual property theft and data security.