It’s no exaggeration to say that the last few years have seen a sea change in attitudes towards offshoring. For many organisations, what began as a very attractive cost cutting strategy is now becoming a challenge compared to providing the same service in-house. There are a number of reasons why an increasing number of businesses are starting to bring key areas back in-house, but it’s nonetheless clear that a significant number of businesses have totally underestimated the impact caused by replacing key in-house skills with outsourced staff in offshore locations.

One of the principle cost drivers for this about turn is that IT salary inflation in emerging markets such as India and China is now becoming a major issue. The cost of retaining the resource base in these markets is growing much faster than the West (eg 3-5 times) and putting great pressure on the budgets of companies that use them as a result.

There’s no doubt that an increase in the levels of competition for skilled employees in countries like India and staff turnover of key, skilled staff is also playing a key role in this process, levels of turnover of 15% and above are common. After all, outsourcers exert a great deal of effort to retain skilled staff, while some workers chase the best wage and benefits from role to role, sometimes flouting employment law and best practice in the process.

However, it’s also true that organisations have chased cheap 'day rates' and services around the world under the assumption that cheaper day rates will automatically result in lower overall costs. However, this assumption tends to made without fully considering or even understanding the potential drop in productivity or time-to-market for new products. Organisations have subsequently found that although they were originally buying an offshore service, they have ended up with large numbers being transferred onshore, with extra costs, as communication issues arise and the need to work closely with their business counterparts becomes apparent.

As a result, there’s a growing acceptance from businesses that they now need to be much more selective about how they approach offshoring, as well as a more strategic approach to what can be effectively outsourced to an offshore provider. As a consequence, CIOs are beginning to realise the importance of having much better resourcing strategies in place to get the blend between in-house and offshore staff and skills right. As productivity and time-to-market become increasingly influential factors, CIOs need to be able to articulate this argument convincingly so that they can persuade their Financial Directors that cheaper days rates does not always mean cheaper overall costs.

So what’s the future for offshoring? Clearly there will always be a need for services to be provided in locations where commodity skills and experience is plentiful. However, as more businesses begin to recognise the importance of using offshoring strategically, and more sparingly, we’ll continue to see more and more of them moving selective services back in-house.