Why Small Tech Companies Aren't Outsourcing

A common misconception is that today's outsourcing trend was driven by the tech industry. Even The Wall Street Journal ran a recent front-page article saying that Silicon Valley had helped power India's outsourcing boom by shifting sophisticated technology jobs there. While the industry does indeed outsource, it has had a minimal impact on the trend as a whole, according to new research. The leading outsourcers have actually been large corporations such as General Electric (GE), Citibank (C), and American Express (AXP). Many of them sent abroad their IT systems, which are different from the innovative software products that tech companies develop. In fact, few tech companies outsource core product development, because it just isn't practical to send this type of innovation offshore. Most are small or midsize businesses and can't achieve the economies of scale that larger businesses stand to gain from outsourcing.

The tech industry has never made up more than 15% of the outsourcing market, says Carnegie Mellon University professor Ashish Arora, who has researched outsourcing extensively. Banking, finance, and insurance account for about 40%, followed by telecom (17%), and manufacturing (12%). Arora includes the product development that companies such as Microsoft (MSFT), Adobe (ADBE.O), and Cisco (CSCO.O) perform in their offshore locations in his estimates.