Lower Cost Domestic Sourcing: A Niche Opportunity for the US

Executive Summary:

Offshoring of IT-related services has become one of the most dominant industry trends over the
past decade and a half. Having started with commodity software functions performed remotely
in India, the global delivery model for IT related services now encompasses higher-end
application functions as well as a wide array of other IT-related activities (contact/call centers,
back office transaction processing, infrastructure, et. al). The widespread availability of
telecommunications and Internet technologies has made it possible for IT employers to utilize
globally distributed virtual teams.

Global sourcing of IT services has become a key strategic initiative for many US enterprises and
is fast becoming the standard way to deliver IT solutions. Absent a significant shift in the geopolitical
scene or increased country level protectionist behaviors, a distributed, globalized IT
labor supply chain will become the dominant IT sourcing model used by G2000 companies.

Today, US corporations are in the forefront of this shift, driven by their need to stay competitive
in today’s global marketplace. The key benefit to date has been significant cost reduction — with
savings estimated at roughly 20-40% for applications related projects. However, global sourcing
also poses challenges for the US.
This has led to vigorous debate among industry, government and the media on the impact of
globalization on US innovation and the socio-economic effects on the US workforce, as well as
what steps might be needed to protect US jobs, intellectual property and security. Some
politicians have called for legislation to limit, or even prohibit, IT offshoring, particularly for
public sector entities.

In response, IT services providers focused on public sector customers, which in many cases are
restricted from using offshore resources, have been examining ways to deliver more cost effective
IT solutions domestically. Concurrently, some dissatisfaction with current offshore efforts and
concerns over the sustainability of the offshore labor arbitrage advantage are causing some
enterprises to reconsider their global strategies and look afresh at new US locations as potential
sourcing destinations. This includes lower cost mid-sized metropolitan areas and rural
communities that can provide a significant cost improvement over Tier 1 IT hubs such as Silicon
Valley, generally in the range of 30%. This is termed lower cost domestic (LCD) sourcing.

In order to inform the discussion, ITAA commissioned this new, independent study on the global
trends for cost effective sourcing of IT services over a strategic planning horizon of 3-10 years.
The goal is to help policy makers, business leaders and others answer the following question —
Is there a viable niche opportunity for lower cost domestic (LCD) sourcing?

This report synthesizes those opinions and provides a view of how the US can become a more
cost effective global sourcing destination by encouraging and nurturing job creation in smaller,
often economically disadvantaged American communities, thereby enabling more cost effective
IT services delivery in the US.

Information Technology Association of America

Full Executive Summary:

(Many thanks to Monica Lynn Babine at the WSU Center to Bridge the Digital Divide for passing this along. Russ)

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