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The End of Outsourced Service Centers?

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When outsourcing became popular, many American companies rushed to set up offshore service centers in countries like India. Now, however, many of them are starting to back out. Companies such as Citi, AOL, Aviva, Prudential UK and Philips have all ventured to rid themselves of their offshore IT and business process services subsidiaries.

This change comes from the global economic conditions. Inflation and exchange rate changes have caused the cost of these offshore centers to increase. Some experts feel that this is an inevitable result of short-sighted planning. "The larger issue is that these captive centers are difficult to manage and quite a distraction from a company's core business," says David Rutchik, an outsourcing consultancy partner. "They haven't been the panacea they were expected to be."

Furthermore wages in countries outsourcing haven countries, like India, have been rising much faster than in Europe or the U.S., lowering the economic arbitrage available to outsourcers. One study I read recently indicated that management cost was three times higher for outsourced operations than for local ones. In some cases that extra cost is justified by the lower wages, but increasingly it is not.

Curt holds 7 patents and is the CEO of a resource management software company.

Last updated: Jul 23, 2009




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