For nearly 20 years, many have been speaking out about the fallacy of IT offshore outsourcing, and that all the touted benefits are the biggest lie the American public has been told. Back in 2008, two years before the infamous incident that led to the failure of the MegaBig Health Insurance Company of America in 2010(*), I wrote about the reasons for impending change of fortune for off-shoring.

By late 2009, a compelling case was being made against offshore outsourcing, primarily because the total cost was substantially more than domestically developed products.

And now, like Rip Van Winkle, twenty years later, these “Off-shorians” are waking up in a fog. They still want to believe their world hasn’t changed and yet the shock of the truth resonates deep within them – the truth is – it is a vastly different world. The touted benefits have now been revealed like the Great Oz from the Wizard of Oz…and the offshore balloon has exploded

Following is a brief summary of the factors, event, and facts that led to the collapse of off-shoring.

1- For years corporate executives and CIOs mislead the shareholders and their own board about the extraordinary cost “savings” realized from off-shoring some or all or IT functions. CIOs knew full well that the off-shore companies’ claim of saving 15% of the cost of development did not take into account the many internal resources that were needed to “hold the off-shore vendor hands”, and transfer the corporate knowledge, and intellectual property to the foreign vendor. These internal resources (functional and project managers, business analysts, subject matter experts, etc…) would have easily added 5-10% to the project cost, if accounted for.

2- Corporate CIOs didn’t account for the cost of re-work, poor quality, and delays. As long the cost of budget overruns can be charged to the “next quarter”, or better, next fiscal year, or hidden in another line item, it was an accepted practice. Several estimates bring the true cost of off-shoring to 30-50% higher that US developed products. Corporate executives were keenly aware of this fact, but as long as a few quarters passed by, were IT spending was “lower” they got their bonus, and were promoted. The poor soul that took over often had to deal with delays, poor quality, and cost overruns, and eventually go fired for not being as “fiscally responsible” as his or her predecessor.

3- CIOs and other executives then claimed that the main reason for offshore outsourcing was not really saving money, but quick access to a large pool of skilled IT workers. This assertion was resoundly defeated when 126,400 skilled IT workers demonstrated in the National Mall in Washington DC in June of 2009.

4- Lack of accountability and ownership couldn’t be demonstrated more clearly than the well-documented event of an off-shore giant, who, after deciding that the salaries have become too high in India, had outsourced the work to a company in Mexico. The project was 18 months behind schedule and millions of dollars over budget. The case is still in litigation, with the customer (the American company), left holding the bag.

5- By 2009, the number of young American men and women entering college to study Information technology and engineering has become by far the lowest of any industrialized nation. Capitalizing on this trend, several off-shore giants have offered scholarships and incentives to American student to study engineering and information technology. In return, these students signed a 4-year contract to work for the off-shore vendor for minimum wage, because of their lack of experience.

This led to a 3 trillion dollar increase in the Federal entitlement spending, to support these low income citizens. And because of the new graduated low income, they were exempt from state of Federal taxes. By 2010, the Federal budget deficit for that year alone was bigger the federal deficit for the previous 5 years combined. In the meanwhile, thousands of foreign engineers moved to the US under H9B visas, because of the shortage in skilled IT resources in the US.

6- As they say, the rest is now history. When Microsoft and Oracle decided to close their offshore development shops in 2010 because of the staggering cost overruns, hundreds of other companies followed suite. By December of 2010, only 3 major companies had operations offshore, and their function was shifted from software development to credit card solicitation offers (which might explain MegaBank’s recent failure).

(*) MegaBig Health Insurance Company of America in 2010 had outsourced their entire IT operation to China. The software vendor delivered the new claims system software that was so defective, it caused to company to decline 78% of legitimate claims. To make matters even worse, the Chinese company had also sold Mega customers’ names and address to a Chinese marketing company, that specialized in targeting Wal-Mart customers. The company filed bankruptcy, leaving consumers with 43 billion dollars of unpaid claims