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IT Leadership // IT Strategy

Outsource More, Spend Less

American workers hate it and campaigning politicians attack the practice. Despite all that, U.S. businesses are outsourcing work at record levels.

The number of outsourcing contracts worth $50 million or more increased 9% in 2005 to 293, according to research by Technology Partners International. It's the largest number of deals that size seen in a single year, the consulting firm said last week. TPI relies on outsourcing announcements and its research of unpublicized deals.

chart: Nowhere But Up: Outsourcing deals worth $50 million or moreWhile the number of deals is up, businesses actually are spending less on outsourcing. That's because more of the work is performed in India or other places where labor is cheap. Indian service providers grabbed 6% of all outsourcing contracts worth more than $50 million in 2005, compared with 2% the previous year.

At the same time, big U.S. outsourcers such as IBM and EDS are increasing staff in their own offshore facilities to stay competitive. Also driving down contract values is the tendency to parcel out work in smaller chunks and for a shorter duration. The total value of contracts let in 2005 dropped 5% to $75 billion, TPI says.

Outsourcing is controversial because critics say U.S. workers pay the price for businesses' desire to use low-cost labor.

Not all work that's outsourced goes to foreign shores. The majority is still performed domestically. In fact, outsourcers are beefing up their local workforces. According to the Labor Department, payrolls among IT-services firms grew by nearly 32,000 workers in 2005, a 2.7% gain for the year. But that's small comfort to IT workers whose jobs have gone overseas.

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