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The Offshore Equation

Is offshoring worth the heat? The financials are compelling, and the benefits may well ripple throughout the economy.
Michael Treacy, a former professor at MIT's Sloan School of Management, isn't surprised by this. "There are, both from a capability and cost perspective, things you can do that would not be done and businesses being built that would not be built" were it not for offshoring, Treacy says.

Treacy is co-author of the best-selling book The Discipline Of Market Leaders (Perseus Books Group, 1997) and chief strategist of Gen3 Partners, a venture-capital firm. Earlier this year, Treacy and some partners invested about $5 million to launch Airgain Inc., a Carlsbad, Calif., company that will develop and sell smart antennas. Conventional antennas are passive--that is, they catch only the signals that wash over them. The search for a better way led Treacy to Russia. He hired a group of Russian scientists and programmers to tap existing Russian research in phased-array radar and tweak the technology for use in wireless broadband networks. The result: a smart antenna that actively seeks out broadband signals and then focuses in the direction of the source. The antennas can lock on to broadband signals at a range 10 times greater than their conventional counterparts.

The Upshot
Offshore development allows many companies to employ high-quality talent they wouldn't otherwise be able to afford

While offshoring has meant hardship for a significant number of American programmers, it benefits other groups of high-tech workers such as project managers

There's evidence that offshoring benefits the U.S. economy as a whole by, for example, keeping inflation in check

Through its compelling cost-benefit equation, offshoring is helping to bring back to the IT industry some of the venture capital that was lost in the dot-com bust

Treacy estimates the venture would have cost at least $15 million to launch had he paid domestic rates for research and development. He doubts he could have raised the additional funding. "It would have been a $15 million gamble that few people would have been willing to take because there was no certainty you could take phased-array radar and move it into this application," Treacy says.

Many venture capitalists fled the tech industry after the dot-com bust, but offshoring offers pumped-up risk-reward ratios that are luring them back. The result is new companies creating new products with benefits that could ripple throughout the economy. For instance, Airgain's technology is a key part of a system purchased by the Southern California city of Cerritos to create a low-cost, community wireless broadband network in an effort to attract more business while bridging the town's digital divide.

Still, if offshoring has the potential to raise all boats, some workers are caught in its turbulent wake. In 2002, the United States lost more than 540,000 IT jobs, according to the Labor Department. Not all those can be ascribed to offshoring, but groups such as the Washington Alliance of Technology Workers, an affiliate of Communications Workers of America, have called for limits to the practice or, at the very least, that some of the savings companies gain from offshoring should be used to retrain affected workers for higher-level jobs.

Offshoring isn't just about cheaper labor. India leads the world in the number of IT services shops that have obtained Carnegie Mellon's CMM Level 5 designation--the industry's highest quality rating for programming. Meanwhile, Eastern Europe, Russia, and former Soviet republics are home to many of the world's top mathematicians. "If I need complex logistics algorithms, absolutely I go to Eastern Europe and Russia," says Treacy, who notes that in those countries "mathematicians are treated like all-stars, while there's not one in 100 Americans who could even name a single mathematician."

Treacy believes that as more and more companies focus on strategic functions that are closely aligned with their businesses goals, they'll outsource a greater portion of their business-technology requirements--to both domestic and offshore workers. Businesses eventually will outsource a full 80% of their IT operations, with half of that going offshore, he says.

"This isn't a choice," Treacy says. "This is like gravity."

Illustration by Dave Plunkert

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