Outsourcing Losing Out to Cheap Labor

A year ago, buildings began being shuttered, traffic began lightening and Wal-Marts began moving in. These are indeed gloomy times. There are thousands of unemployed IT workers nationwide, but Silicon Valley is surely suffering more. Here, everyone is in a frenzy seeking self-actualization. What were actualizing is that an employers market might make outsourcing projects relatively pricey, especially for large-enterprise companies.

Thats one reason its difficult to understand how Loudcloud, one of the most famous IT outsourcing companies, manages not only to survive but also to thrive through last weeks acquisition by EDS. Loudcloud sold its managed services business to EDS, and Loudcloud will become a software company called Opsware.

The irony is that, as Loudcloud re-emerges as a Silicon Valley software company (and not a software and services company), it is outsourcing its operations to EDS, which is using the Opsware software. In the press conference announcing the agreement, Marc Andreessen—the sole reason that Loudcloud is famous—said the deal with EDS “marries Silicon Valley innovation with … enterprise validation. It shows the growing importance of automation that over time leads to utility computing.”

Its clear that battle-scarred organizations believe IT is an unavoidable necessity. Racking up millions in costs and producing a 3-1 ratio of headaches to competitive advantages will do that. This occurred primarily in the days of nearly zero unemployment, meaning that costs were high and the talent pool was low. The situation is quite different now.

Several Gartner reports over the past few months seem to disagree, however. April and May reports that targeted health care estimated that in five years, a majority of institutions will spend more on outsourcing than on internal IT. Another April report showed that in Europe, business operations outsourcing will be the fastest-growing component of IT spending.

The Gartner reports certainly have a point. So do the successful outsourcing businesses such as Loudcloud (oops, EDS) and Salesforce.com. IT spenders should, however, consider the possibility that some projects, once designated for outsourcing, can be bargains right now if done internally.

Outsource or “insource”—whats best for troubled times? Write to me at john_taschek@ziffdavis.com.

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