SPRING CONFERENCE: Offshoring's Pros And Cons

When offshore outsourcing emerged as a significant business trend several years ago, many viewed it as a shrewd, low-cost alternative to investing in larger domestic IT operations. More recently, however, offshore outsourcing has become a complex social, economic, and political issue that raises more questions than it answers.

Roy Dunbar, Eli Lilly & Co.'s president of international operations, addressed three key aspects of offshore outsourcing and the backlash that it has created on Monday during his keynote at InformationWeek's Spring Conference. While cost-cutting originally was viewed as the chief benefit of hiring offshore talent, he said, many question just how long wages in developing countries will lag far behind those in the United States.

Another critical issue for U.S.-based companies to consider is whether investments in the economies of developing countries will open up new markets for those companies--or whether this money is ultimately training America's future economic competitors. A third key aspect Dunbar addressed is whether the loss of low-level IT and call-center jobs will evaporate the next generation of IT leaders in this country.

Dunbar maintains that cost cutting is a short-term benefit. "Outsourcing just to gain cost savings is dangerous," he said, adding that if a company's competitors can achieve the same cost savings by similarly outsourcing operations offshore, what competitive advantage has that original company gained? "We rarely outsource just to get cost savings," he noted, adding that hourly rates and salaries are on the rise in India, where Lilly employs 400 IT workers.

On whether outsourcing is helping the economy or training the competition, on a positive note Dunbar said, "growing economies are consuming economies." As U.S.-based companies create jobs in other countries, they're also creating new markets for their products. Dunbar also cited a recent study by McKinsey Global Institute, an independent economics think tank within management consulting firm McKinsey & Co., that said the U.S. economy recovers $1.13 for every $1 that goes to an offshore location. In other words, the profits from using the offshore model benefit domestic workers when the company invests in new technology and creates new jobs.

On the other hand, Dunbar noted that companies must be careful of the level of intellectual property that they entrust to any outsourcer. The work that Lilly outsources to its India-based employee contains low levels of the company's intellectual property. "We've kept higher-value work in-house," Dunbar said. "You've got to be careful about what you outsource because collaborators can become competitors."

Lilly avoided cutting IT workers when it outsourced work to India by retraining those workers to do other jobs. "People conclude that outsourcing is one of the worst things to happen to the U.S. economy," said Dunbar, who served as Lilly's CIO for four years until his promotion last year. But the way a company manages the outsourcing process and its impact on employees comes down "to a respect for people."

Still, the United States must also be wary of sending too much of its junior-level work to other countries because doing so could hurt the future of the country's workforce, Said Dunbar. "You can't sever the umbilical cord to the future."